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Unit

Government andFree Enterprise

Washington, D.C., is the center of the UnitedStates government. All of the major nationalgovernment offices are located there. The photo

on the opposite page shows the tall Washington Monument.The United States Capitol building is just behind it. This iswhere Congress meets.

Why do we need to talk about government in an economicstextbook? In earlier chapters, you learned some ways thatgovernment affects the economy. This unit continues to explorethis topic. The unit will discuss the many systems and laws thatthe government uses to control the economy. This unit alsodescribes the process of the United States budget and how thegovernment pays for certain services for its citizens. The unitexplains how an economic system is measured to determine itsgrowth. Finally, this unit discusses certain economic problemsthat the American government is trying to control.

Chapters in Unit 5

Chapter 15: The Role of Government 292

Chapter 16: The Federal Budget 316

Chapter 17: Checking the Economy 332

Chapter 18: Economic Challenges 348

291

Chapter

The Role ofGovernment

Depending on what actions it takes, the United Statesgovernment can strengthen or weaken the health ofthe economy. Many government decisions affect

economic growth. How much money will the governmentspend? On what will it spend the money? Where will the moneycome from? The answers to all of these questions are importantto economic health.

If you ever have had to file a tax return, you know firsthand thatpeople pay taxes. This chapter will talk about the many differentkinds of taxes. It also will talk about the role of the Americangovernment in the economy.

Goals for Learning

+ To explain how and why the role of government in theeconomy has grown

+ To identify the parts of the government bureaucracythat affect the economy

^ To summarize how fiscal policy is used to managethe economy

+ To explain the differences between proportional,progressive, and regressive income taxes

^ To identify the other types of taxes Americans pay

293

The Growth in Government

Laissez-faireThe French phrase thatmeans "leave us atone;"it refers to the belief thatthe government shouldnot get involved in

economic matters

What Does "Laissez-Faire" Mean?

In the late 17th century, France had a king. The king's financeminister asked a merchant how the government could helpbusiness. The merchant answered "laissez nous faire " whichmeans, "leave us alone." Ever since, laissez-faire has become amotto for the free enterprise system. According to laissez-faire,the government should not get involved in economic matters.Business decisions should be left to businesses.

What Gives the Government the Right to BeInvolved in the Economy?

The United States Constitution gives the government the powerto control trade within the country and with foreign countries.It also gives it the power to coin money and charge taxes. Taxes,as we will see later in this chapter, have a great effect on theeconomy. The United States government spends a lot of money.You use government goods and services every day. For example, the

government provides funds for highwaysand national defense. About one-third ofall money spent in the United States isfrom government spending.

When Did the Government'sRole in the Economy Beginto Grow?

The government's role in the economygrew as the nation expanded westward.Roads and canals had to be built to makeit easier for settlers to move west. Oncebuilt, roads and canals made it easier to

The government helped shiP Soods tc markets in me east Alread>'fo build the first railroad m tne early 1800s, the U.S. government sold public land to help payconnecting the east and for the needed roads. In the 1860s, the first railroads connectingwest coasts in the tjie ^Q coasts were buj]t wjtn ne]p from the government.1860s.

294 Unit 5 Government and Free Enterprise

Interstate tradeTrade among the states

Public policyThe process ofgovernment decisionmaking that addressesproblems affecting

many people

The American economy grew a lot during the late 1800s andearly 1900s. Congress used its power to control the largebusinesses that developed. Over time, several governmentagencies were created. They tried to protect the interests ofthe common people.

For example, after the Civil War, farmers complained aboutthe high rates they were being charged to ship their crops tomarket. State governments tried to set railroad rates. TheSupreme Court ruled that only the federal government hadthe right to control interstate trade. This is trade amongthe states. This decision led to the creation of the InterstateCommerce Commission (ICC) in 1887. It set the pattern forgovernment control. In the last 100 years, Congress passedother laws controlling business and protecting consumers.

Until the 1930s, the government's role in the economy waslimited. This changed in the 1930s. During the Great Depression,the economy was in such bad shape that the U.S. government hadto act. Since then, the role of government in the economy hasgrown. Today, government is involved in the economy in manyways. It plays a very important role in keeping the economystrong and growing.

What Is Public Policy?

Sometimes, government agencies try to solve problems or dealwith issues that affect a large number of people. The name forthe process of government decision making is public policy.

There are policies that keep the national economy runningwell. There are policies providing health care for the poor andelderly. There are policies about the treatment of disabledAmericans. Other policies are in place to make sure that everyAmerican gets a good education. Public policy is created whenall of the rules and laws about what persons can and cannot doare brought together.

The Role of Government Chapter 15 295

Word BankConstitution

Great Depression

interstate trade

laissez-faire

public policy

AccountantAccountants keep records of a company's finances. Theyfollow the Generally Accepted Accounting Principles (GAAP).Accountants watch revenue and expenses. They are expected tocontrol company spending. Their tasks often include preparingreports and schedules for company leaders. In some cases,accountants are expected to train others in their area.

Many accountants are involved in yearly budgeting of spending andforecasting of income. They look for financial trends. They prepareinformation for the Internal Revenue Service and other governmentagencies, as required by law. Accountants may be asked to preparea regular schedule for auditors who will review their work.

Today's accountants may help design or build computer systemsfor recording financial information.

Lesson 1 Review On a separate sheet of paper, write the wordfrom the Word Bank to complete each sentence.

1. The motto for the free enterprise system is _ .

2. The government's power to trade inside and outside thecountry, to coin money, and to raise taxes comes from the

3. The Supreme Court ruled that the central governmentcould control .

, the U.S. government took a much4. During the __greater role in the economy.

5. Government decision making is called

What do you think /

6. What might happen if all of the states could set rates fortrade among the states?

7. Why do you think the role of government in the economygrew so much during the Great Depression?


Lessor? The Bureaucracy

Legislative branchThe branch of the U.S.government that makes

the laws; Congress

Judicial branchThe branch of the U.S.

government thatinterprets the laws;

the courts

Executive branchThe branch of the U.S.government that makes

sure the laws are carriedout; the president andthe federal bureaucracy

FederalbureaucracyThe large group of people

who work/or the federalgovernment, mostly for

the executive branch

CabinetA group of executivedepartment leaders whoadvise the president

Executive agenciesAgencies within theexecutive branch ofgovernment under thedirect control of thepresident

RegulatorycommissionsGovernment agenciesthat watch over somepart of the U.S. economy

What Are the Three Branches of Government?

There are three branches of government in the United States.They are the legislative branch, the judicial branch, and theexecutive branch. The Congress is the legislative branch. Itmakes the laws. The courts are the judicial branch. It interpretsthe laws. The executive branch makes sure that the laws arecarried out. The president is the chief executive.

Over three million other federal government workers form thefederal bureaucracy. Some of the bureaucracy is part of thelegislative branch, but most of it belongs to the executive branch.The bureaucracy sometimes is called the fourth branch ofgovernment because it has grown so large and important.

How Is the Federal Bureaucracy Organized?

The federal bureaucracy has three main parts:

• Cabinet departments and independent executive agencies

• Independent regulatory commissions

• Government corporations

The Cabinet is not mentioned in the Constitution. It developedalmost as soon as George Washington was elected the firstpresident of the United States. The Cabinet is a group ofexecutive department leaders who advise the president. Thenumber of Cabinet members can change. The leader of thenewest department, the Department of Homeland Security,became a member of the Cabinet in 2002.

Cabinet departments are large. They include many separateagencies. Many people work within each department. Eachdepartment is made up of smaller units called bureaus, offices,services, or divisions. These offices are scattered around the countrywherever they are needed to serve the people. Almost every Cabinetdepartment affects the economy in some way. Several Cabinetdepartments have great power to affect the economy.


The Department of Agriculture has offices in every state. It overseesfarmers to make sure food production meets demand. It inspectsmeat, poultry, and dairy products to make sure they are safe to eat.It tries to help farmers and consumers through its many foodservices. Its Food and Nutrition Service provides food stamps andruns school lunch programs. Its Natural Resource ConservationService teaches farmers about the soil and growing crops.

In the late 1800s, Congress passed laws against unfair laborpractices. The Department of Labor was set up in 1913 toenforce these laws. Today, it sees that all federal laws concerninglabor are carried out. It enforces child labor and minimumwage laws. Its Employment Standards Administration enforcesfair hiring practices. It stops discrimination against minorities,women, veterans, and disabled people.

One of the most important parts of the Department of Labor isthe Occupational Safety and Health Administration (OSHA).It sets health and safety standards for the workplace. TheDepartment of Labor also includes the UnemploymentInsurance Services. This provides money to workers whohave lost their jobs through no fault of their own.

The Department of Commerce began in 1903. It was created toencourage the growth of American business. It oversees businessand trade in the United States and in foreign countries. It collectsinformation about the health of the U.S. economy. The departmentis made up of several agencies. For example, the U.S. Patent Officeissues patents to people who invent new products or ideas.

What Are Independent Executive Agencies?

Independent executive agencies are not part of the Cabinet. They areagencies within the executive branch of government under the directcontrol of the president. The size and duties of each agency differgreatly. The General Services Administration (GSA), for example, isvery large and important. It manages federal government propertyand records. The Small Business Administration (SBA) is anotherlarge agency. It helps people start new businesses. It gives themadvice about setting up and operating a business. It provides low-cost loans to help the businesses get off the ground.


MedicareTheprogram thatprovides medicalcare for the elderly

The FederalCommunicationsCommission (FCC)controls the many kindsof media such as radioand television.

The Social Security Administration (SSA) became an independentagency in 1994. More than 65,000 people work for the agency.The SSA spends more money than any of the other independentagencies. Most of the money is paid to retired or disabled workers.Children and the husbands and wives of workers who have diedreceive benefits too. The SSA also handles health care for peopleover 65. The program that provides medical care for the elderly iscalled Medicare.

What Are Independent Regulatory Commissions?

An independent regulatory commission is a government agencythat watches over some part of the U.S. economy. Some regulatorycommissions look after transportation and communication.Other regulatory commissions control banking, labor unions,public utilities, and corporations. They make and enforce rules.The rules that these regulatory commissions make affect manyparts of our everyday lives.

What Are Some of the Most ImportantRegulatory Commissions?

The Federal Trade Commission (FTC) enforces laws that protect thepublic. It protects us from such things as price fixing, false labeling,and advertising that makes untrue claims. The FTC also makes surethat products put on the market are safe. It makes sure that labels onproducts are truthful so that buyers know what they are getting.

The Federal Communications Commission (FCC) controls whocan have a license to broadcast over radio and television. It watchesover interstate and international communications by radio,television, wire, satellite, and cable. The FCC has several bureausand offices that have a direct effect on business. For example, theOffice of Communications Business Opportunities gives adviceto small and minority-owned communication businesses.

The National Labor Relations Board (NLRB) has two mainpurposes. The first is to see that workers are treated fairly bytheir employers and by labor groups. The second is to hold secretballot elections when employees vote on whether they wish to berepresented by a labor union. Workers may file complaints andlawsuits against employers and unions through this agency.


What Is a Government Corporation?A government corporation is like a private corporation. The bigdifference is that the government owns it rather than shareholders.The president of the United States chooses a board of directorsand a general manager to run each government corporation.Congress must approve these choices. Government corporationsare supposed to be more flexible than regular government agencies.They are free from certain controls that affect other agencies.

Today, there are over 50 government corporations in the executivebranch. The best known of these is the United States Postal Service(USPS). It became a government corporation in 1971. It operatesand protects the nation's mail service. Only the Postal Service candeliver first-class mail. It delivers over 630 million pieces of mailevery day. The USPS employs nearly 800,000 workers.

Another government corporation is the Federal DepositInsurance Corporation (FDIC). It was created to protect thesavings of Americans. The FDIC will repay a person's money,up to $100,000, if a bank fails.

Lesson 2 Review On a separate sheet of paper, write answersto the following questions. Use complete sentences.

1. What are the three branches of the United States government?

2. What is the name of the agency that pays money to retiredor disabled workers?

3. What is the purpose of the Federal CommunicationsCommission?

4. List the two purposes of the National Labor Relations Board.

5. What is the name of the best-known governmentcorporation?

What do you think

6. Why do you think only the United States Postal Service candeliver first-class mail?

7. Do you think the U.S. government needs a bureaucracy? Explai


Lesson Fiscal Policy

Fiscal policyThe government's use ofspending and taxes toachieve a strong, stableeconomy

Expansionaryfiscal policyA government financialpolicy in which anincrease in governmentspending or a decreasein taxes hopes to get theeconomy to grow

What Is Fiscal Policy?

Economists agree on some things. They agree that steady economicgrowth is good. They all want employment for every person whowants to work. They also believe that high productivity and stableprices are good goals. Earlier we learned that the Federal ReserveSystem uses monetary policy to influence the economy. Fiscalpolicy is the government's use of spending and taxes to achieve astrong, stable economy.

How Does the Government Use Fiscal Policy toEncourage Economic Growth?

In Chapter 8, we learned about the circular flow of money inthe economy. The circular flow model is important because itshows how a change in one part of the economy can causechanges in another. It is important to keep this idea in mindwhen we talk about fiscal policy.

Suppose the government increases its spending. Eor example, itdecides to add to the highway system or to build a new weaponssystem. The effect is to create more jobs. More working peoplemeans more total spending in the economy. This kind of policy iscalled expansionary fiscal policy. The hope is that as a result of thepolicy, the economy will expand, or grow. The government mightuse an expansionary fiscal policy if the economy is not growing fastenough and there are not enough jobs.

Another way the government tries to get the economy to growis through tax cuts. Suppose the government decides to lowertaxes. This means that consumers and businesses have moremoney to spend. People have more money for groceries,clothes, and new cars. Businesses have more money to spendon new equipment, factories, and raw materials. If they spendthe extra money, it creates a demand for more production. Byincreasing spending, the economy expands. When people andbusinesses save the extra money instead of spending it, theeconomy will not grow.


Contractionaryfiscal policyA government financial

policy in whichdecreased governmentspending or an increasein taxes hopes to get theeconomy to slow down

DeficitThe difference betweenhow much money the

government takes inand how much it spends

How Does the Government Use Fiscal Policy toSlow Down the Economy?Fiscal policy can be used to slow down and expand the economy.The president and Congress might use fiscal policy to slow downspending if they feel that prices are rising too fast. Governmentmight spend less. It could raise taxes. The effect of both actionsis to reduce the amount of money available to buy goods andservices. There is less total spending. The government might takethese actions to lower inflation. The goal is to contract, or makethe economy smaller. This kind of policy is called contractionaryfiscal policy.

How Did President Bush Try to IncreaseEconomic Growth?In 2003, President Bush got Congress to pass a $330 billiondollar tax cut. Some people believed it was risky. The supporterssaid the tax cut would create a huge investment boom. Bush andhis backers in Congress believed that the tax cut would pushbusinesses to expand. New workers would be hired and theeconomy would begin to grow again. Some supporters said thetax cut would create as many as one million new jobs.

Those against the tax cut said it would cause a huge jump in thefederal deficit. The deficit is the difference between how muchmoney the government takes in and how much it spends.

Biography

W. Arthur Lewis: 1915-1991British economist W. Arthur Lewis published an article detailing hisidea of the "dual economy" in 1954. He felt that a poor country'seconomy could be viewed as having two very different parts. Onewas a small capitalist sector while the other was a very large farmingsector. Employers in the capitalist sector cut down on overhead,often through efficient hiring. Those in the agricultural sector oftenhire too many people, so the productivity is low.

Lewis thought that more workers should be directed to jobs in the capitalist sector,especially in manufacturing. Increased staffing and profit would mean a growth inindustry. He argued that a poor country's increase in farm product exports just bringsdown the market value of those products. Lewis and another man, Theodore Schultz,were awarded the Nobel Prize in 1979 for research in economic development.


Supply-sideeconomicsThe belief that the bestway to get a stable andgrowing economy is toincrease the supply ofgoods and services

Demand-sideeconomicsThe belief that the

government's policiescan increase the totalamount of goods and

services consumers

want to buy

To make up the difference, the government has to borrowmoney. We know that the supply of money for loans is limited.Government will be in competition with businesses that needmoney to expand. This will cause interest rates to rise.

One of the problems with fiscal policy is that it works slowly. Ittakes a long time for the government to make decisions. By thetime it does, the economy may have changed. Some economistsbelieve that the government can never get it right. They believeit is best for the government to leave the economy alone.

What Is Supply-Side Economics?The debate over fiscal policy points out that not all economistsagree. They have two very different points of view. Supply-sideeconomics is the belief that the best way to keep an economystable and growing is to increase the supply of goods andservices. Supply-side economists believe in laissez-faire. They donot want the government to play a big role in the economy. Theybelieve government control makes it hard for businesses tooperate well. Reducing control will give businesses incentives toincrease production. Prices will drop because the supply of goodsand services increases. Businesses will hire more workers as theirproduction goes up. Supply-side economists favor tax cuts. Theybelieve the tax cuts encourage people and businesses to spendand invest more. This increases demand and causes the economyto grow.

What Is Demand-Side Economics?Demand-side economics focuses on the role of demand.Demand-side economists believe the government's policies canincrease the total amount of goods and services consumers wantto buy. They believe that government control of the economy isnecessary. They believe that the government should be involvedto create jobs. For example, suppose the government decides tospend billions of dollars on new roads. Many new constructionjobs would be created. The new workers would spend the moneythey earned. This would increase total demand. More peoplewould have jobs, and the economy would begin to grow.


Figure 15.1 summarizes the points of view of supply-side anddemand-side economics.

Figure 15.1Comparing Supply-Side andDemand-Side Economics

Supply-Side Economics Demand-Side Economics

Encourageproduction to

increasesupply

Cut taxes andgovernment

control

Businesses andpeople willspend and

invest more;new jobscreated

GOAL:

Keep the

economy

growing and

unemployment

low

Encouragedemand forgoods and

services

Cut taxes and/or increase

governmentspending; new

jobs created

New workershave moremoney to

spend;increased

buying createsdemand

Businessesincrease

production tomeet growing

demand


Lesson 3 Review On a separate sheet of paper, write the letterof the answer that correctly completes each sentence.

1. Increased government spending that leads to more totalspending is .

A contractionary fiscal C laissez-fairepolicy

B expansionary fiscal D legislative fiscalpolicy policy

2. By spending less or raising taxes, the government followsa(n) policy

A contractionary fiscal C laissez-faire

B expansionary fiscal D executive fiscal

3. The difference between what the government spends andwhat it takes in is _ _.

A laissez-faire C the economy

B the deficit D a depression

4. economics is the belief that the best way to makethe economy grow is to increase the supply of goodsand services.

A Demand-side C Supply-side

B Regulated D Unregulated

5. economics is the belief that one way to make theeconomy grow is to have more government involvement inthe economy.

A Demand-side C Supply-side

B Regulated D Unregulated

What do you think '

6. Do you think it is fair for the government to raise taxes toslow down the economy? Explain.

7. Do you agree more with supply-side or demand-sideeconomists? Why?


Lesson Taxes

Protective tariffA tax used to protectcertain businesses; it isa tax on imports

ImportA good entering the

country from anothercountry

Sin taxA tax that can be used

to get people to stopdoing certain things

that the government

finds harmful

Income taxA tax people pay onmoney earned

Progressive taxA tax in which the moremoney a person wakes,the greater the percentagepaid in taxes

In 1789, Benjamin Franklin joked that nothing in life is certainexcept death and taxes. Taxes are payments to the government.Taxes can be paid to a city, a state, or the federal government. Theyare as old as civilization. Taxpayers' dislike of taxes goes back as far.

How Are Taxes Used?The main purpose of taxes is to pay for the cost of government.Taxes also have several other uses. They can be used to protectcertain businesses. Such a tax is called a protective tariff. It isa tax on imports, or goods entering the country from anothercountry. The tax increases the cost of the imported goods.Consumers are more likely to buy goods made in their owncountry if those goods are cheaper than imported ones.

Taxes can be used to get people to stop doing certain things thatthe government finds harmful. This type of tax sometimes iscalled a sin tax. For example, governments try to discouragepeople from drinking alcohol and smoking. To do this, theyraise taxes on cigarettes and liquor. The high costs sometimesstop people from drinking and smoking.

Taxes also can be used to encourage certain activities. In the 1970s,the government wanted businesses and people to lower theirenergy costs. The government offered lower taxes to businessesand people who bought equipment that used less energyThis gave businesses an incentive to build factories and installmachines that saved energy. Some homeowners replaced theirold windows with new ones that lowered their energy needs.

What Is a Progressive Tax?The federal income tax (a tax people pay on money earned)is an example of a progressive tax. The more money a personmakes, the greater the percentage paid in taxes. For example,suppose we look at two workers. The first earns $100,000 a year.The second worker makes $20,000. The tax rate for the lowerincome worker is 15 percent. The person making $100,000 pays35 percent. The higher income person pays a tax of $35,000. Thelower income person pays $3,000.


Proportional taxA tax that is stated as apercentage; also calledfiat tax

Regressive taxA tax in which thehigher the income, thesmaller the percentageof income paid as taxes

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Writing AboutEconomics

You have learnedabout progressive,proportional, andregressive taxes.Select the tax thatyou think is best.Write a speechas if you werea member ofCongress. Explainwhy you think thetax you choseis best.

Some people think that a progressive tax is a good idea. Theybelieve that people making more money should pay a higherrate. Other people argue that this is unfair to people who earna lot of money.

What Is a Proportional Tax?

A proportional tax sometimes is called a flat tax. It is stated asa percentage. Suppose the United States had a flat tax. The taxrate would be the same no matter what a person's income was.

Suppose we look at the two workers in the example in the lastparagraph on page 306 again. A proportional tax of 20 percentwould take $20,000 from the higher income worker. The lowerincome worker would pay $4,000. The proportion of moneytaken out for taxes stays the same as income rises. Some peoplelike this kind of tax because it treats everyone equally. Theybelieve that proportional taxes are more fair than theprogressive taxes the United States has.

What Is a Regressive Tax?

Most taxes, other than income taxes, are regressive. With aregressive tax, the higher the income, the smaller the percentageof income paid as taxes. For example, let's say that the two workersabove both decide to buy a computer. The cost of the computersthey buy is $ 1,000 with an 8 percent sales tax. They both pay anextra $80. The $80 the lower-income person pays is a higherpercentage of that person's income than the $80 the higher-income person pays.

What Are the Most Common Types ofFederal Taxes?

Figure 15.2 on page 308 shows from where the U.S. governmentgets its money. Individual income tax provides the biggest share.This tax sometimes is called "personal income tax." Most peoplein the United States must pay income tax. It is a progressive tax.What people pay depends on how much money they earn. Theearnings include money they earn from jobs. It also includesmoney earned from investments.


Corporateincome taxThe amount of moneya corporation pays thegovernment on money itearns each year

DeductionAn expense like amedical expense orinterest on a loan thatcan he subtracted fromincome taxes

AdjustmentA part of income that isnot taxed, such as all orpart of Social Securitybenefits

ExemptionAn exact dollar amountthat is not taxed, suchas a claim for each childwho depends on his orher parents

Figure IS.2Where the United StatesGovernment Gets Its Money

Personal Income Tax49%

Corporate Income Tax10%

Social Insurance andRetirement Receipts34%

Excise Tax3%

Other4%

Corporations pay taxes too. Corporate income tax is theamount of money a corporation pays the government onmoney it earns each year.

People and corporations pay taxes based on "taxable income."It is the income after deductions, adjustments, and exemptionsfrom the total or gross income. Deductions are expenses likemedical expenses and interest on loans. Adjustments may beparts of income that are not taxed, such as all or part of SocialSecurity benefits. An exemption is an exact dollar amount that isnot taxed. Taxpayers can claim an exemption for each child whodepends on his or her parents.


Excise taxA tax on certain goodsmade in that country,such as perfume,alcohol, and tobacco

Customs taxA tax placed on goods

imported from anothercountry

Estate taxA tax on the propertythat was left by someonewho has died

Inheritance taxA tax a person receiving

money from a personwho died must pay

Anyone who works knows that take-home pay is much lessthan gross pay. A certain amount is taken out for federal andstate income taxes. Some money also is taken out for SocialSecurity tax. The Social Security tax is shown as PICA onthe paychecks that workers receive. PICA stands for FederalInsurance Contribution Act. Everybody has to pay this taxno matter how little they earn. Social Security is money thegovernment pays to retired and disabled workers. Morethan 50 million Americans receive Social Security paymentseach month.

An excise tax is a tax on certain goods made in the country. Thegoods taxed are often luxuries, but not always. There are excisetaxes on perfume, alcohol, and tobacco. Sometimes an excisetax helps pay for services for the people who buy an item. Forexample, the excise tax on gasoline helps pay for roads. Businessessometimes pay excise taxes too. For example, businesses thatprocess natural resources like lumber and natural gas pay excisetaxes. Gas and electric companies also pay them.

A customs tax was the first tax Congress passed. The customstax, or tariff, is a tax placed on goods imported from anothercountry.

When a person dies, that person can leave property andmoney to family and friends. An estate tax is a tax on theproperty that was left. The person receiving money from theperson who died may have to pay taxes. This tax is called aninheritance tax. People are allowed to give gifts of moneyor property before they die. Whether a tax has to be paiddepends on the total value of the money or property. If thevalue is less than $1,000,000, no estate taxes have to be paid.

The Internal Revenue Service is the federal agency that collectstax money. It is commonly known by its initials, IRS.


Sales taxA tax that is paid on theprice of goods or services

What Kinds of Taxes Do States and LocalGovernments Collect?

States and local governments also collect a variety of taxes.Local taxes are paid to towns, cities, and counties. The taxes arecomputed and collected in the same way as federal taxes. Therates, however, are not as high. Therefore, people or corporationspay less to state and local governments than to the federalgovernment. Income taxes are the major source of incomefor most state and local governments.

Many state and local governments collect sales taxes. A sales taxis a tax that is paid on the price of goods or services. Sales taxesare not paid on every product. For example, some states do notcollect sales taxes on food or medicine. There is not a sales taxon home sales. Sales taxes differ from state to state.

Economics in Your Life

Identity TheftIdentity theft happens when someone uses another person'sname to commit a crime, usually for financial gain. The thief maytake money from bank accounts, make credit purchases, or runup large phone card bills. Sometimes the identity thief opensnew accounts in the victim's name. Recovering from identifytheft can be a very long, difficult process. In 1998, the U.S.Congress passed laws making identity theft a federal crime.

Identity thieves may look through trash to find banking or creditcard account numbers. At times, they gain personal informationby telephone or during Internet sessions. You can decrease thelikelihood of identity theft in many ways.

• Destroy old credit cards and banking materials before throwingthem into the trash.

• Never give out personal information over the telephone unlessyou know the other person well.

• Make Internet purchases only through secure payment sitesand pay by credit card.

• Review monthly credit card and bank statements to check onall charges.


Property taxA tax that people whoown buildings, land,and other propertymust pay

Word Bankfinds harmful

customs taxes

imports

Internal RevenueService

regressive taxes

A big source of money for state and local governments is propertytax. This is a tax that people who own buildings, land, and otherproperty must pay. The amount of tax collected depends on theestimated value of the property. The money collected fromproperty taxes often pays for such things as police and fireprotection. It also helps pay for road building and repair. Muchof the property taxes collected pay for the cost of building andmaintaining public schools.


1. A protective tariff is a tax on _ _.

2. A sin tax is placed on something the government .

3. are a higher percentage of a smaller income.

4. The first taxes used in the United States were .

5. The agency that collects U.S. taxes is the .

What do you think

6. Most states have both state income taxes and sales taxes. Inthe states with no state taxes, sales taxes are usually muchhigher than in states with income taxes. Which kind of statewould you prefer to live or work in? Explain using what youlearned in this lesson.

7. Taxes are used for many purposes. What might happen ifthere were no taxes at all? Explain.


Document-Based Reading

Tax Relief Plan

When UnitedStates PresidentCeorge W. Bushtook office, onething he wantedto do was reducetaxes. He believeda tax cut wouldhelp create jobsand boost theeconomy. Belowis an excerpt from

Radio Address by the President to the Nationfrom February 2001.

Today many Americans are feeling squeezed.They work 40, 50, 60 hours a week, and stillhave trouble paying the electric bill and thegrocery bill at the same time. At the end of along week, they collect their paycheck, andwhat the federal government takes is oftenunfair. . . .

My plan does some important things forAmerica. It reduces taxes for everyone whopays taxes. It lowers the lowest income taxrate from 15 percent to 10 percent. It cuts thehighest rate to 33 percent, because I believeno one should pay more than a third of theirincome to the federal government. Theaverage family of four will get about $1,600of their own money returned back to them.

There's a lot of talk in Washington aboutpaying down the national debt, and that'sgood, and that's important. And my budgetwill do that. But American families havedebts to pay, as well. A tax cut now willstimulate our economy and create jobs. . . .

My plan will keep all Social Security money inthe Social Security system, where it belongs.We will eliminate the death tax [estate tax],saving family farms and family-ownedbusinesses. We'll reduce the maximum rateon small business income to 33 percent, sothey can help create the jobs we need. Aboveall, my plan unlocks the door to the middleclass for millions of hardworking Americans.

Despite much criticism from Democrats,Congress approved a $330 billion 10-year taxcut. The Senate approved the bill by a 5?-50vote with Vice President Dick Cheney castingthe deciding vote. The bill passed in the Houseby a 231-200 vote. President Bush signed thebill into law on May 28, 2003.

Document-Based Questions

1. Why did President Bush want to reducetaxes?

2. According to Bush, how would his planaffect income tax rates?

3. What are two other ways Bush said hisplan would help Americans?

4. Why do you think Democrats criticizedthe tax plan?

5. Do you think it is more important toreduce taxes or to pay down thenational debt? Explain.


Chapter 15 S U M M A R Y

During the late 1800s and early 1900s,the U.S. government grew. After theGreat Depression of the 1930s, thegovernment's role in the economygrew even more.

To deal with issues affecting manypeople, the government creates publicpolicy. This occurs when all of the lawsand rules about people's behavior arebrought together.

The large group of people who workfor the government is the federalbureaucracy. Because the bureaucracyis so large, it is sometimes called thefourth branch of government.

The three main parts of the federalbureaucracy are Cabinet departmentsand independent executive agencies,independent regulatory commissions,and government corporations.

The president directly controlsindependent executive agencies. TheSmall Business Administration (SBA)and the Social Security Administration(SSA) are examples.

Independent regulatory commissionswatch over areas of the U.S. economy.Some examples are the FederalTrade Commission (FTC), FederalCommunications Commission (FCC),and the National Labor RelationsBoard (NLRB).

A general manager and board ofdirectors chosen by the president rungovernment corporations. The UnitedStates Postal Service (USPS) and theFederal Deposit Insurance Corporation(FDIC) are two governmentcorporations.

Fiscal policy is the use of spendingand taxing to create a strongeconomy. Fiscal policy can be eitherexpansionary or contractionary.

Taxes serve many purposes. They maypay for government services. Theyprotect certain businesses. Protectivetariffs increase the cost of imports. Sintaxes may be used to get people to stopharmful activities. Other taxes encouragehelpful activities.

The three kinds of taxes are progressive,regressive, and proportional, or flat,taxes. Some federal tax examples areincome, Social Security, excise,customs, and estate taxes.

The Internal Revenue Service (IRS)collects tax money in the United States.

Besides federal taxes, states and otherlocal governments collect taxes. Someexamples are sales and property taxes.


Word Bankbureaucracy

Cabinet

Constitution

deficit

excise

progressive tax

tax cuts

Chapter IS R E V I E W

On a separate sheet of paper, write the word from the WordBank to complete each sentence.

1. The gives the U.S. government the power tocontrol trade.

2. The is a group of people who advise thepresident.

3. The federal is a group of workers who work forthe federal government.

4. Sometimes the government uses to make theeconomy grow.

5. The _____ _ is the difference between the money thegovernment takes in and the money it spends.

6. A(n) tax is a tax on goods made in a country.

7. With a , a person pays a greater percentage oftaxes by earning more money.

On a separate sheet of paper, write the letter of the answer thatcorrectly completes each sentence.

8. Government decision making is called public _ _.

A affairs C policyB good D voting

9. are agencies in the executive branch under thepresident's direct control.A Independent executive C Public corporations

D Public agenciesagencies

B Nonprofitcorporations

10. The government, rather than private shareholders, ownsa

A governmentcorporation

B government lobby

C private business

D public office


11. To have a strong, healthy economy, the government uses

A competition C increased taxation

B fiscal policy D excise taxes

12. A tax that protects certain businesses is a(n)

A enterprise C protective tarilA enterprise C protective tariff

B progressive tax D tax cut

13. Another name for a proportional tax is a(n) .A flat tax C steep tax

B regressive tax D tariff

On a separate sheet of paper, write answers to the followingquestions. Use complete sentences.

14. What does laissez-faire mean?

15. Which department was created to enforce laws againstunfair labor practices?

16. Which economic point of view wants to increase theeconomy by increasing the supply of goods and services?

17. List the three basic types of taxes. Explain each.

On a separate sheet of paper, write your opinion to eachquestion. Use complete sentences.

18. Why do you think the government has grown as hugebusinesses developed?

19. Many people complain about government bureaucracy.What do you think might happen if no bureaucracy existed?

20. Where do you think higher taxes are needed? Where doyou think lower taxes might be needed?

When taking a short-answer test, first answer the questionsyou know. Then go back to spend time on the questionsthat you are less sure about.


Chapter

The FederalBudget

We know that government has a large income. Itcollects trillions of dollars in taxes. Governmentalso is a big spender. Every year, the United States

government creates a budget. This budget has an importantinfluence on all Americans.

This chapter will discuss the federal budget and the debt theUnited States owes.

Goals for Learning

* To describe the federal budget process

^ To discuss how the government spends its money

+ To explain the national debt and its impact onthe economy

317

Lesson The Federal Budget Process

Federal budgetAn estimate of howmuch money the federal

government will take inand how much it willspend in a year

Fiscal yearThe government'sspending period from

October 1 to September30 of the next year

PrioritySomething that receivesattention before

anything else; the thingthat is most important

CompromiseTo give up a part of

what one wants in orderto settle differences andreach agreement

In Chapter 13, you learned how important it is to create abudget for yourself. You learned that a budget is a plan forspending and saving money. The federal budget is an estimateof how much money the government will take in and howmuch it will spend in a year. The budget covers 12 monthsstarting on October 1 and ending September 30 of the nextyear. This period is the government's fiscal year.

Why Is the Budget Important?The federal budget tells us the national priorities. Prioritiesare things that receive attention before anything else. In otherwords, they are what is most important. For example, finishingschool has a higher priority than getting married for most highschool students. Likewise, if the government decides to spendmore on education, that means that the government thinks goodschools are important. Cutting spending does not mean that theareas of cuts are not important. It means that they have a lowerpriority, at least in the government's opinion at the time.

Work begins on the federal budget more than a year before themoney is spent. Both the president and the Congress look at thebudget carefully. Deciding which programs to fund and which tocut is very hard. Rarely is everyone happy with the final budget.Some groups become upset because the budget leaves outthings that are important to them. The final budget is always acompromise. This means that to settle differences and reachagreement, all groups have to give up a part of what they want.

What Is the Budget Process?The president proposes the budget to Congress, but Congressmust approve it. The proposed budget reflects the president'spriorities. For example, the president may have to decide on a newweapons system or a program to help senior citizens, or both. Ofcourse, the president does not have time to make every minorbudget decision. Most details are left to the budget director andthe White House staff. Congress then draws up its own versionof the budget. It can expand some programs and cut others.


Appropriation billA bill that gives agovernment agencythe money it needs forthe year

The president of theUnited States proposesthe budget, butCongress mustapprove it.

What Is the Job of the Office of Managementand Budget?The budget director heads the Office of Management andBudget (OMB). It is in charge of preparing the president'sbudget. It begins work more than a year and a half before thebeginning of the fiscal year. The OMB reports to the presidenton the state of the economy. The budget director may suggest tothe president what fiscal policies the government should follow.

What Is the President's Role in the Budget?The president adjusts the size of the federal budget based oninformation from the OMB. The president suggests generalspending targets for each of the Cabinet departments. Afterthe president has set the targets, the many parts of the federalbureaucracy begin planning their budgets. OMB leaders meetwith each department and agency to work out budget details.The president reviews each department's plans and makes thefinal changes. In January of each year, the president sends theproposed budget to Congress.

What Is the Roleof Congress in theBudget?Congress and thepresident do not alwaysagree on spendingpriorities. There oftenis conflict over thebudget. Both the Senateand the House ofRepresentatives havebudget committees.These committees lookat the president's budget

and make changes. The Congressional Budget Office (CBO)helps Congress look at the budget. Congress approves the finalbudget by passing a set of appropriation bills. These bills giveeach government agency the money it needs for the year.

The Federal Budget Chapter 16 319

VetoTo reject

What Happens After Congress Approvesthe Budget?Like all bills, appropriation bills are sent to the president. If thepresident signs them, they become law. The president may veto,or reject, any appropriation bills. In 1996, Congress gave thepresident the power to reject certain budget items. Before then,the president had to accept or reject the budget as a whole. Abill can still become law even if the president vetoes it. Thishappens only if two-thirds of Congress votes for the bill.

Why Does the Budget Have to Be Changed?Just like a personal budget, the federal budget has to be flexible. It isbased on estimated income and spending. For many reasons, theamount of money the government collects in taxes can be lowerthan expected. Likewise, there can be unexpected expenses. Forexample, after the September 11,2001 attacks, the government spentbillions of dollars defending the country against similar attacks. Thegovernment also has spent billions of dollars fighting in Iraq andAfghanistan. These events forced Congress to adjust the budget.

Biography

John Maynard Keynes: 1883-1946British economist John Maynard Keynes is an important personin the history of economics. During World War I, Keynescreated a plan for paying for Britain's war effort. He did sowell that he was asked to take part in the peace conference atthe end of the war. At the conference, he felt that damagepayments asked of Germany were too harsh. Keynes resignedfrom the conference and wrote Economic Consequences ofPeace. This book criticized the Treaty of Versailles, the peacetreaty that ended World War I.

In 1936, Keynes published a book called The General Theory of Employment, Interest, andMoney. Many economists believe that this book is the most important economics writingof the 20th century. It changed the way the world looked at how the role of governmentaffects the economy.

Keynes also taught at Cambridge University. His talks and writings brought him intodebates on public policy. He believed that monetary policy of governments could controlthe economy. Many of his ideas were used during World War II, including controllingsupply and demand of consumer goods through a system of rationing.


Lesson 1 Review On a separate sheet of paper, write the letterof the answer that correctly completes each sentence.

1. The 12 months from October 1 to September 30 of the nextyear is the government's _____ year.

A calendar C governing

B fiscal D planning

2. The final budget for any year is a _____ because allgroups have had to give up something.

A compromise C necessity

B failure D success

3. During the , the president proposes a budget, andCongress must approve it.

A budget process C compromise process

B coming year D fiscal year

4. The president sends the budget to Congress every .

A month C January

B July D two years

5. The president can _, or reject, Congress'sappropriation bills.

A increase C lower

B decrease D veto

What do you think

6. Why do you think Congress has to approve the president'sbudget?

7. Why do you think the government must start working onthe federal budget so far in advance? Give examples fromthe lesson to support your ideas.


Lesson Government Spending

Private sectorConsumers buying

goods and services

Public sectorFederal, state, and local

governments buying

goods and services

Human resourcesThe benefits paid directlyto people, includingSocial Security, incomesecurity. Medicare,health, education, and

veterans benefits

Income securityThe benefits paid toretired workers who arenot covered by SocialSecurity

What Are Private and Public Sectors?Consumer spending is called the private sector. Governments areimportant consumers too. Federal, state, and local governmentsspend nearly three trillion dollars a year. This spending is calledthe public sector.

On What Does the U.S. Government Spend Money?The United States government spent over two trillion dollarsin 2002. Where did the money go? To better understandgovernment spending, the government breaks down itsspending into several large categories. (See Figure 16.1.)

Human ResourcesThe largest category of government spending is human resources.It includes all benefits paid directly to the people: Social Security,income security. Medicare, health, education, and benefits andservices for those who have served in the military.

The Social Security program is the largest category of governmentspending on human resources. Benefits are paid mostly to retired ordisabled workers. Children and spouses dependent on workers whohave become too sick to work or who have died also may get money.

figure 16.1Federal Spending for 2002

Physical Resources

^Other-

Net Interest

National Defense

*Human Resources

'Human Resources includes: itraining, employment, and <services; health; Medicare; itsecurity; Social Security; andbenefits and services.

Physical Resources includes: enatural resources and environcommerce and housing credittransportation; and communiand regional development.

*Other includes: internationalagriculture, administration ofand general government.


MedicaidA government programthat gives medicalinsurance to low-income people

VeteranA man or woman

who has served in

the armed forces

EntitlementA benefit such as

Social Security, incomesecurity, or Medicare towhich people feei theyhave a right

Writing AboutEconomics

Find a newspaper,magazine, orInternet articleabout governmentspending. Readthe article andsummarize it in aparagraph. Includewhere the moneyis being spent andhow much it willcost. Share yourarticle andparagraph withyour class.

Income security includes benefits paid to retired workers who arenot covered by Social Security. They include retired military persons,government workers, and railroad workers. This category alsoincludes such things as food programs to help low-income families.

Medicare, as you learned in Chapter 14, is a governmentprogram that provides medical services to people over age 65.The largest part of the health category is Medicaid. This is aprogram that gives medical insurance to people with lowincome. Drug treatment and mental health programs, as well ascancer research, fall under health spending. The Occupational,Safety, and Health Administration (OSHA) does too.

The federal government spends a lot of money on education. Itfunds schools at every level, programs for daycare, foster care,and summer employment for students. Children who arehomeless, neglected, or handicapped also receive help.

Veterans are men and women who have served in the armedforces. They receive education and training benefits from thegovernment. Veterans who want to buy a home can get specialmortgages that charge a lower interest rate than regular mortgages.

Social Security, income security, Medicare, and similar programsare entitlements. Many people believe they are entitled, or havea right to, these benefits. As a result, the president and Congressare not likely to cut these benefits. Entitlements are the fastestgrowing part of the federal budget.

National DefenseUntil the late 1990s, national defense was the largest categoryof federal spending. Some of the money goes to pay the menand women in the armed forces. Much of the money is spentdeveloping new weapons and buying equipment for the military.

Net InterestThe government often spends more money than it takes in.When this happens, it has to borrow money. Much of the federalbudget goes to paying the interest on the money owed. This iscalled net interest. In 2002, the government paid an estimated$ 178.4 billion in interest. As the amount of money owedcontinues to grow, so does the net interest.


Physical Resources

Physical resources include money spent on natural resources andthe environment. The costs of pollution control and buying land fornew national parks also fall into this group. Transportation is partof physical resources. This includes spending for new highways,airports, and certain forms of mass transit, such as buses and trains.

SociologistA sociologist studies the ways in which groups of people interact. Sociologists completeresearch, field work, and written reports about human behavior. They study manydifferent groups, including social classes, minorities, women, children, political groups,and religious groups.

There are many other career fields in which a sociologist may work. Sociologists mayteach or write about social issues. They often work as experts for leaders dealing withsocial problems. In some cases, sociologists work for change on behalf of a certain group.Sometimes sociologists work in social services, such as family planning or job training.

Sociology is a very large field. Many sociologists choose to specialize in certain areas. Theymay study crime prevention. They may work to solve problems within certain businesses.Some sociologists study the effects of technology in rural areas. Others look at the positiveand negative outcomes of city development.

Lesson 2 Review On a separate sheet of paper, write answersto the following questions. Use complete sentences.

1. What is the largest category of government spending?

2. Who receives Social Security benefits?

3. What is an entitlement?

4. What is net interest?

5. How is money in the physical resources category spent?

What do you think

6. What do you think might happen if not enough money wasavailable to pay for entitlement programs?

7. The government collects billions of dollars in taxes. Why doyou think it must borrow money in addition to that?


The National Debt

SurplusA budget in which moremoney is collected thanis spent

National debtAll of the money the

federal government

owes to lenders

Crowding-outeffectThe higher interest rateson borrowed moneythat result after thegovernment hasborrowed what it needs

If taxes equal government spending, the budget is balanced.However, it is unusual for a government to have an exactlybalanced budget. Most of the time, budgets are either in deficitor surplus. If the government spends less than it collects, thebudget has a surplus. More often, the government spends morethan it collects. Such a budget has a deficit. Many people worryabout a string of deficit budgets. The government has toborrow money to pay for the extra spending. The borrowedmoney must be paid back with interest. The money thegovernment owes to all lenders is called the national debt.

How Long Has the United States Had aNational Debt?The United States first went into debt in 1790. The governmentdecided to take over the Revolutionary War debts of theContinental Congress. By the end of 1790, the debt was just over$75 million. Because of World War II, there was a huge increase inthe national debt. It rose from $40 billion to $279 billion. Warslike the Korean War and the Vietnam War made the debt evengreater. In 2003, the government was spending nearly $4 billion amonth on the war in Iraq. The Office of Management and Budgetprojected that the budget deficit will grow to $455 billion. Thisincreased the national debt to nearly $7 trillion for 2003.

What Are Some Problems with Having a LargeNational Debt?Many people have concerns about the growing national debt. Oneconcern is higher interest rates. There is only so much moneyavailable for borrowing. The government has to borrow even ifthe interest rate is high. It results in what is called the crowding-out effect. Government borrowing "crowds out" other people andbusinesses that need to borrow. After the government takes what itneeds, other borrowers must pay higher rates to borrow money.Some economists believe that if government borrowing increases,then economic growth will slow down. Productivity no longerwill grow and the economy will slow down.


Treasury noteA security with a valueof$1,000 to $5,000 thatmatures in one toten years

Treasury bondA long-term securityissued in units of $1,000that matures in 10 to30 years

Another concern is the effect of the rising debt on futureAmericans who must pay back the debt. Some people are afraidof so much money being used to pay interest on the debt. Theyfear that the government will have to reduce its spending onother important goods and services. There may not be enoughmoney to provide some of the programs Americans take forgranted, such as Social Security. Businesses may not haveenough capital to invest. America will lose its competitive edge.

Are There Any Advantages to the High Debt?

It is important to remember that government spending helped liftthe economy out of depression and recession many times. Thegovernment continues to provide Americans with many necessarygoods and services. If the government was forced to balance thebudget, the quality of life for many Americans might get worse.

How Can the Government Spend Money It DoesNot Have?

We know that the government owes trillions of dollars. Wheredoes it borrow that much money? The government raisesmoney by selling bonds and securities. There are four maintypes of bonds and securities that the United States Treasurysells: treasury bills, treasury notes, treasury bonds, and savingsbonds. Treasury bills are short-term securities. They mature,or come due, in one year or less. The minimum amount is$1,000. Treasury notes mature in one to ten years. Notes rangefrom $1,000 to $5,000. They earn a little higher interest ratethan treasury bills. Treasury bonds are issued in units of $1,000.They are long-term investments whose maturity ranges from 10to 30 years. Savings bonds can be bought for as little as $25. Ifyou own a savings bond, you own part of the national debt.

Some government agencies hold the national debt. Forexample, the Social Security Administration holds about $2trillion. It uses some of its surplus to buy government bondsand securities. People, businesses, banks, and even foreignershold much of the debt. In fact, people in other countries andtheir governments own about one-fourth of the debt. Saversview government bonds and securities as good investments.


They know that their money is safe. The federal governmentalways pays investors back with interest. For this reason, thegovernment has little trouble selling its bonds and securities.

Economics in Your Life

The National Debt—Just How Big Is It?

The national debt is the total amount of money that the United States government owes. Asof September 2003, the national debt was about $6.7 trillion. Written out, this number is$6,700,000,000,000. It is rising at a rate of more than $1 billion per day. The amount of thedebt has risen steadily since 1983.

Just how much money is $6.7 trillion? Think about these examples.

• If your take-home pay was $20,000 per year, it would take you about 335 million yearsto earn this much money.

• You could buy 1,340,000 personal jets.

• You could buy 1 3,400 professional football teams.

• The richest person in America is worth about $50 billion. It would take the combinedwealth of about 130 people like this to pay off the debt.

People sometimes confuse the national debt with the federal budget deficit. The national debtis the total amount the government owes. The deficit is the difference between the amountthe government takes in and the amount it spends each year.

Word Bankcrowding-out

effect

interest

national debt

savings bond

treasury bond


1. The money the government owes to all lenders is the ,

2. The _ _ is when borrowers pay higher interest ratesfor money after the government takes what it needs.

3. One way people loan the government money is bypurchasing a(n) .

4. The type of security with the longest maturity is the _

5. The government has little trouble selling bonds andsecurities because it always repays investors with .

What do you think ;

6. Why might government debt be good? Explain.

7. If you had extra money, would you buy a shorter-term orlonger-term government security? Why?


Document-Based Reading

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Savings Bonds

One way the UnitedStates governmentraises money is byselling savings bonds.During World War II,Americans boughtbonds to help financethe war effort. Theyfelt that by purchasing bonds, they were doingtheir part to help the United States win the war.Since World War II, savings bonds havecontinued to be an important way to help payfor the national debt. After the September 11,2001 terrorist attacks, many Americans againfelt the need to help. Because of this, thegovernment issued a new savings bond calledthe Patriot Bond.

Secretary of the Treasury Paul H. O'Neill andU.S. Treasurer Rosario Marin . . . unveiled

Series EE savings bonds designated as"Patriot Bonds" on the three-monthanniversary of the September 11, 2001terrorists attacks... .

"Since September 11, everywhere I go,Americans of every age come up to me andsay they want to help," said Secretary O'Neill.

"We've seen an amazing outpouring ofcharity from across the nation, and anincrease in the number of people who wantto do public service," he said. "These are allhealthy trends for our nation and ourgovernment. The Patriot Bond is anopportunity for all Americans to contributeto the government's war effort and save fortheir futures as well."

sKRiiisEEPATR IOT BONI>

Series EE savingsbonds soldthrough financialinstitutions will bespecially inscribedwith the legend"Patriot Bond." .

Series EE savings bonds, earn 90 percent of5-year Treasury securities yields. . . . Thebonds sell as half face value and are availablein denominations of $50, $75, $100, $200,$500, $1,000, $5,000 and $10,000. (Forexample, a $100 Patriot Bond costs $50.)

Series EE bonds increase in value monthly andinterest is compounded semiannually. Interest isexempt from state and local income taxes andfederal tax can be deferred until the bond isredeemed or it stops earning interest at 30 years.

The money raised from the sale of Patriot Bondsis deposited in the general fund and spentaccording to law. While the funds are not usedonly for the War on Terrorism, they do helpsupport America's anti-terrorism effort.

Document-Based Questions

1. Why does the United States governmentsell savings bonds?

2. Why did many Americans buy bondsduring World War II?

3. What is a Patriot Bond?

4. How much would a $500 PatriotBond cost?

5. Do you think savings bonds are a goodinvestment for Americans? Explain.


Chapter 16 S U M M A R Y

Work on the federal budget starts morethan a year before the money is spent.The White House staff and the Officeof Management and Budget (OMB)draw up the president's budget.The president suggests spendingtargets. OMB officials work out thedetails. The president presents thebudget to Congress each January.Congress looks at the budget with helpfrom the Congressional Budget Office(CBO), Congress passes appropriationbills and returns the budget to thepresident. The president may eithersign the bills into law or veto them.Consumer spending is called theprivate sector. Government spending iscalled the public sector.

Human resources is the largestcategory of government spending.Entitlements are programs that peoplefeel they have a right to receive.Social Security pays benefits to retiredor disabled workers and peopledependent on workers who havebecome too sick to work or have died.Retired workers not covered by SocialSecurity receive income security. Thesepeople include retired military,government, and railroad workers.Medicare provides medical services topeople older than age 65. Medicaidprovides health insurance to low-income people.

Schools in every state and at every levelreceive education funds. This money alsofunds daycare programs and foster care.Veterans' benefits include educationand training benefits and specialmortgage rates.Other government expenses includenational defense, interest payments onthe national debt, and physical resources.The national debt is money thegovernment owes all lenders. The UnitedStates has had a national debt since 1790.One concern with having a largenational debt is that governmentspending will create a crowding-outeffect and push interest rates higher. Asecond concern is that the governmentspends too much on paying back thedebt. People worry that not enoughmoney will remain to pay for othernecessary goods and services.Many times, government spendinghas helped lift the country out of adepression or recession.The four main types of governmentbonds and securities are treasury bills,treasury notes, treasury bonds, andsavings bonds.Government agencies, businesses,banks, and people and governmentsfrom other countries hold much ofthe national debt in bonds.


Chapter 16 R E V I E W

On a separate sheet of paper, write the word from the WordBank to complete each sentence.

1. Things that receive attention before other things have high

Congress

Medicare

national debt

priority

public

savings

veterans

on2. The president does not always agree withbudget priorities.

3. Spending by local, state, and federal government occurs inthe sector.

4. is a government program that provides medicalservices to people over age 65.

5. Men and women who have served in the armed forces are

6. Someone who owns anational debt.

bond owns part of the

7. People and governments in other countries own aboutone-fourth of the .

On a separate sheet of paper, write the letter of the answer thatcorrectly completes each sentence.

8. The heads the Office of Management andBudget.

A budget director

B president

9. The Congressionalpresident's budget.A Accountant C Budget OfficeB Balancing Office D Office of Budgetary

Commitment

10. The involves consumers buying goodsand services.

A federal budget C private sectorB national defense D public sector

C secretary of the treasury

D speaker of the house

_ helps Congress judge the


11. . pays benefits to workers not covered by SocialSecurity.A Medicaid C Net interestB Income security D Physical resources

12. By increasing spending, the government has lifted thecountry out of .A budgetary restrictions C warB communism D depression

13. The government security with the shortest maturityperiod is a .A treasury dollar C treasury billB treasury bond D treasury note

On a separate sheet of paper, write answers to the followingquestions. Use complete sentences.

14. What is the federal government's fiscal year?

15. Briefly describe the budget process.

16. How is part of the budget spent for veterans?

17. Why are some people concerned about the effect of thenational debt on future Americans?

On a separate sheet of paper, write your opinion to eachquestion. Use complete sentences.

18. Why must the budget go back and forth between Congressand the president so many times?

19. If you had to do away with one of the entitlementsmentioned in the text, which would you choose? Explainyour choice.

20. Do you think the federal government should be forced tohave a balanced budget every year? Explain.

In a matching test, each item should be used just once. Checkyour answers. If you repeated an item, then another item wasleft out. Find the best spot for the item you left out.


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