The view that the American system is not "government by the people" but actually government by an elite. The elite is thought of as made up of a comparatively small number who exert a tremendous amount of economic, social, and political power. (1:6) These are the same elite who entrust the people of America to decide their future employment every 4 to 6 years and who are responsible as a whole for helping to balancing our federal government's power. They may be wise or stupid, benign or cruel, concerned about the problems of the masses or blind to them, representative of the people as a whole or concerned only about themselves (1:6-7) whatever the case may be, they have the job of legislating the American economy. Ultimately they, our United States Congress determine "How the Federal Government spends money."

In this paper we shall attempt to analyze (1) Who Controls the Federal Money, (2) Why Federal Cost Haved Increased, and (3) Why Our Defecit Is So Large. After reading this paper it is the hope of the writer that you will have a better understanding of how the Federal Government operates using its fiscal policy to meet the needs of the American people. In a changing world you, the reader will be the ultimate judge as to whether the Federal Government can financially govern America.

The Constitution states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law." Thus the President may propose a budget, but Congress makes final decisions as to how much money will be spent. The executive branch has the responsibility of executing the programs mandated by law. Each year, the President sends his request for budget appropriations to Capitol Hill. The year's appropriations must cover continuing programs as well as any monies needed to launch new programs. Members of Congress also write new legislation that sets up new programs, but until the appropriations process makes funding available, the laws cannot take effect.

The president is the chief economic decision maker through his control over the budget, the financial institutions, and Federal spending. (1:313) However no one man can ever hope to even slightly understand the workings of our Federal economy. Thus, the President relies on three special "institutions" to dispurse and collect from America's checkbook.

Recognizing the president's need for more economic expertise in the White House, the Employment Act of 1946 established the Council of Economic Advisers (CEA). The council consists of three members appointed by the president, with confirmation by the Senate. The president designates one of the three as a chairman. For the last three decades, the chairman of the CEA has been a key figure in federal economic policy. He is one of a small group of high- level economic officials who interact regularly with the president, advising him on what economic issues need his attention and what his options are. Other members of this informal economic policy committee are the secretary of the Treasury and the director of the Office of Management and Budget (OMB). The Council of Economic Advisers does not make and execute policy; rather it advises the president.

Established in 1789, the Treasury Department is one of the original executive departments. Today it is by far the most influential Cabinet department in economic policy. The Treasury is in the middle of econopmic planning and policy management. Its secretary serves with the head of the OMB and the chairman of the Council of Economic Advisers in what has developed over successive administrations to be an informal economic central committee.

Located in the Executive Office of the President, the Office of Management and Budget (OMB) was established in 1970 as a sucessor to the old Bureau of the Budget. Among its various activities, the OMB assists the president in preparing the budget he submits each year to Congress and, more generally, in formulating a fiscal program for the U.S. government. It is also responsible for overseeing the executive branch expenditures.

The OMB was created on the premise that the executive budget cannot be left to the separate acts of the various departments and agencies. It is concerned with the budget's overall impact. It adjusts the " wish lists" of all the executive agencies, producing a reasonbly unified budget that reflects at least in part an administration's fiscal policy judgments and objectives.

Various agencies play critical and not-so-critical roles in our government. As defined, an agency usually meanns any governmental body (2:406), however, there are many agencies which are wholly separate from the federal government except in the area of funding. These "independent agencies" are the ones that most concern us because they require a significant sum of our federal dollars.

Until the 1880's, nearly all of what the Federal Government did was done through the Cabinet Departments. Over the years since then, however, Congress has created nearly all the agencies under the president. (2:431) Many have come and some have gone. Today they number close to 200. Their functions range from the fields of transportation and communications through labor-management relations and finance to veterans affairs, nuclear energy and natural resources.

The label "independent agency" is a catch-all. Most of them are independent only in the sense that they are not located within any of the 13 Cabinet departments. They are not independent of the President and the executive branch. Some of these agencies are independent in a much more concrete way, however. For most purposes though, they are largely free of presidential control.

The main reason that Federal costs have skyrocketed throughout the years lies in the tremendous demands made upon its budget. Thus, the federal budget itself can be a descriptive report of America's economic agenda.


"Serving diverse purposes, a budget can be... a political act, a plan of work, a prediction, a source of enlightenment, a means of obfuscation, a mechanism of control, an escape from restrictions, a means to action, a brake on progress, even a prayer that the powers that be will deal gently with the best aspirations of fallible men. " (6:v)

As the Federal government spends money to protect our lives and property and to pay for schools, medical research, and many other programs and services, the costs of all these services continually goes up. Our country has undergone vast economic, social, and military changes and the national government has taken on heavier and heavier burdens. (1:17)

President Washington created the Treasury Department as one of the original Cabinet positions. The first secretary of Treasury, Alexander Hamilton, established the federal budget as the cornerstone of national financial stability. The budget, or spending program, would reflect the President's ideas about national needs and priorities. The President would then ask Congress to provide the money necessary to carry out these federal responsibilities.

Not only has government spending increased in dollar amounts since 1789, but the percentage of national income earmarked for federal use has also grown continuously. In 1790 , for example, when the population was approximately 4 million, the average federal budget was less than $6 million--- about the $1.50 per person. By fiscal 1978, the government was spending over $459 billion a year for population of around 215 millon---about $2,134 per person. (4:126)

Federal spending over the pasts forty years has grown at an accelerating pace largely because Americans have insisted that government take a more active role in the country's economic and social life. In the 1880's most people were content if the federal government defended the country, maintained a postal service, and tended to governmental housekeeping. Tariffs (taxes on imports) and sale of public lands provided most of the federal revenue (income).

By the 1890's, however, Americans began insisting that the federal government regulate the large corporations; more importantly, they were also demanding more governmental services of all kinds. These new services required additional public employees, as well as additional dollars. By 1977, 2.9 million civilians (over 98 percent in the executive branch) and 2.1 million member's of the armed forces, were working for the federal government. (4:126-7)

As recently as 1900 , the federal government was condemned by some for spending $500 million a year. By 1977, with a population increase of about 175 percent since the turn of the century, total federal outlays had soared to 750 times the figures in the earliest years. (4:132)

Military expenditures have traditionally grabbed the biggest share of the budget, even in peacetime. In recent years, however, the Pentagon's share of the budget has decreased sharply. Between 1965 and 1977, for example defense costs as a percentage of the total government fell sharply, from 41 percent to 24 percent. The total dollar in defense rose from $50 billion in 1965 to $100.1 billion in 1977; but when inflation is taken into account, this actually represents a slight decrease. (4:132) Improving relations with the former Soviet Union and China, plus the end of direct military involvement in Vietnam, made this decrease possible. Barring a renewed arms race, this trend should continue to release federal dollars and energies for investment in human needs.

Government expenditures for education, unemployment compensation, medicare, antipoverty programs, agriculture, and other social welfare projects make up the human resources segment of the budget. These costs jumped from 30 percent to 53 percent of all federal spending in the twelve years between 1965 and 1977. (4:133)

Now the largest and fastest growing budget category, human resources reflects a changing emphasis in American priorities. Citizens seem ever more willing to accept a government role in improving the quality of life in the United States.

Ever since the depression of the 1930's, when the government accepted unbalanced budgets as the price of helping jobless and hungry Americans, interest on the national debt has skyrocketed. Basically, this interest is the fee paid for borrowing money to finance activities which the government cannot pay for out of yearly tax revenues.

Nine percent of the 1977 budget was earmarked for interest payments on the national debt. Higher interest rates and the increasing size of the debt pushed the interest payments from $1 billion in 1939 to $38 billion in 1977. (4:133-4)

Interstate highways, public housing projects, NASA's "space shots", agricultural subsidies, and even congressional office space illustrate the varied programs financed by the 11 percent of the 1977 budget devoted to physical resources. (4:134) As the nation's largest landowner and landlord, the federal government has a yearly housekeeping bill in the billions, even before Congress and the President add new research and construction projects.

A miscellaneous collection of expenses make up the last 3 percent of the 1977 budget. (4:134) Money and arms given as foreign aid, support for the United Nations, disaster relief, and similar items make up this category.

The Federal Government is the largest single employer in the United States. Some 2.8 million people now work in the federal bureaucy. (2:432) Of that huge number only about 2500 are appointed by the President. The Chief Executive names the top-ranking men and women (and their immediate aides and assistants) who serve in the Executive Office, in the 13 Cabinet departments, in the many independent agencies, and in American embassies and other diplomatic posts. Most of the other jobs in the federal government are now filled through the competitive civil service system

The Bureau of Government Financial Operations, the government's central bookeeeper and principal financial reporting agency, (2:412) is given the task of preventing wasteful federal spending. Yet, even their best efforts are not enough to irradicate this problem. Lobbyist for special interest and an often overly optimistic Congress members have sunk millions of federal dollars into "dry well" projects. Also, as depicted by the cartoon, this problem is further aggravated by incompetent Senators do not fully realize the enormous amounts of money that they are dealing with. Thus, we get a sort of "wilful ignorance" on the part of congressional leaders towards any budgetary item out of their own interest.

In order for us to change wasteful spending we must get involved with our nation's economy. Instead of merely "contributing" our tax dollars, we should demand to know what our money is being spent for. By putting pressure on our Congressmen and the President we as a people can suceed where "wilful ignorance" and "dry wells" have onced failed us.

Ever since the New Deal days the President has been responsible for planning against depressions, fighting inflation, and taking quick action in the face of an emergency. (1:316) In keeping with this, our Federal Government must now provide for the welfare of its citizens.

Social-welfare spending has been increasing at a rate much greater than the overall economy. In 1950 govrenment welfare expenditures were only 8 percent of the GNP; thirty years later the proportion had more than doubled, to just under 19 percent. (5:637) As the country got wealthier, welfare spending by the government became a bigger proportion of the total. This increase was especially prounced at the federal level, where welfare was just 3.7 percent of the GNP in 1950 but rose to 11.5 percent of the GNP in 1980. (5:638) Social-welfare spending has claimed a steadily increasing share of government's expenditures. In 1950, just 26 percent of all federal spending went for social welfare; 30 years later the proportion has climbed to 54 percent. (5:638)

The big jump in welfare spending reflects increases in both the number of beneficiaries and the amount of benefits provided to individual recipients. The most dramatic increase in the former has come in the Social Security Program. In 1960 14.8 million people received benefits under OASDI; twenty-five years later, in 1985, the number was 36.8 million. (5:638) Another large part resulted from demographic shifts: the simple expansion of the number of older people.

Medicaid uses a combination of federal and state funds in providing medical assistance to the poor. About half the program costs are borne by Washington. The states are required to provide health benefits, according to federal standards, to all who qualify for public assistance, but the states set the benefit levels and administer the program. AFDC involves a federal-state mix similar to that of Medicaid. The national government reimburses the states for about half of the total benefit costs. The states administer the program and set a criteria for eligibility, as well as benefit levels, subject to a variety of federal requirements. The Food Stamp program is totally federally funded, and uniform eligibility standards are required of all states.

Under Unemployment Compensation the states collect from the employers (all those employing eight or more workers) according to a federally determined wage base, but they must place these tax receipts in the federally administered Unemployment Trust Fund (where separate accounts are maintained for each state). The federal government shares in the costs of extended benefits. When a state is overdrawn, as happens quite often in periods of high unemployment, it can borrow from the federal government to ensure a continuation of prescribed benefits. Unemployment compensation is managed by the states subject to federal standards.

It is the job of the Bureau of Public Debt to supervise most federal borrowing operations and to manage the public debt or defecit. (2:412) However, as we discussed previously, with America's "budgetary crunch" the Federal Government must make other amends to meet its fiscal obligations. The federal government has borrowed huge amounts of money to try to balance its budget. To do so, it has issued several kinds of government bonds.

Everyone who owns a federal bond has loaned money to the government. Each year the government must pay interest on these bonds, and some of the bonds themselves must be paid off. These payments add to the costs of government and to our national debt

How large a debt can our federal government owe? By law, the federal government can borrow only as much as Congress votes to permit. Congress has established a debt limit for the federal government. The federal government must keep its borrowing within this debt limit unless Congress votes to raise the debt limit to a higher sum.

Revolutions, even those that happened in the 1700's, cost money. The United States was literally born with a national debt. By 1900 the debt was $1.3 billion. Because of World War II, the debt ballooned sixfold, from $43 billion in 1940 to $257 billion 1950. By 1977 the figure stood at $700.1 billion---which represented $3,256 for every man, woman, and child in the United States. (4:135)

The federal government creates the national debt by spending more money than it collects. This practice is called deficit spending . In 1977 for example, the budget deficit reached $57.2 billion. (4:136) Given their choice the President and Congress would prefer to operate under a balanced budget, with income equal to outgo. A budget surplus would even allow the government to pay off some of the debt, as happened occasionally during the last century.

Debt repayment becomes a luxury, however, when Congress and the President realize that the needs of the American people cannot be met from current income. During a time of high unemployment, for example, the government may borrow money and pump it into the economy. If this practice suceeds, jobs are created---but so is a deficit, which must be added to the national debt to be repaid later.

As the United States pays out more and more money in interest each year, two additional problems result:

1. The dollar declines in value. The old cliche' "as sound as a dollar" no longer holds true internationally. With the government running far into debt, foreign investors sell off their dollars. This lack of confidence results in a loss of value for the dollar, as compared to stronger currencies such as the West German deutsche mark, the Swiss franc, or the Japanese yen. (4:136)

2. Inflation increases. When the government borrows large sums of money, interest rates soar. Everything in the economy costs more to produce, and the prices of what Americans buy jumps upward. (4:137)

America's budgetary and deficit-related problems have come about by means that are beyond the scope of this paper. However, this does not mean that the answer to our fiscal problem is equally as difficult. If we as a people rise up and tell our federal government what we want, how we want it, how much we're willing to pay and work together with (not at) our federal government, we will make America the land of the fiscally free and the home of the debt-reducing brave.

1. Burns, James Mac Gregor. Government by the people, 8th ed. New Jersey: Prentice Hall, Incorporated, 1972.

2. McClenaghan, William A. Magruder's American Government. Boston: Allyn and Bacon, Incorporated, 1984.

3. Hartley, William H. American Civics. Orlando: Harcourt Brace Jovanich, Publishers, 1987.

4. Sanford, William R. Basic Principals of American Government. New York: Amsco School Publications, Incorporated, 1979.

5. Ladd, Everett Carll. The American Polity, 3rd ed. New York: W. W. Norton & Company, 1989.

6. Wildavsky, Aaron. The Politics of the Budgetary Process. New Jersey:
Prentice Hall, Incorporated, 1972.