The Federal Budget: What a Difference a Day Makes
Subject Opportunity cost
Topic Production possibility frontiers
Key Words Budget, programs, funds, training, grants, fees, costs
News Story

In the wake of September 11, President Bush's budget has shifted priorities dramatically. The winners are those programs that are linked to national security, such as the Pentagon, bio-terrorism defense (including the Centers for Disease Control and Prevention, hospitals and health departments, and bio-safety labs), airlines and airports, the Coast Guard and seaport police, and firefighters, police and other "first responders". Homeland defense funds will double, if the budget is approved.

The losers are those programs that are unrelated to national defense. The Department of Labor's Employment Training Administration faces a 20 percent cut, mainly in its Youth Opportunity Grants and Youth Offender Grants. Medicare reimbursement fees for health care providers will continue to be held down. The Commerce Department's Manufacturing Extension Program and some fossil-energy research will be eliminated. The President also wants to put some mandatory programs (not normally subject to review) under the discretion of the White House and Congress. These include child-care and social-service block grants to the states, the federal flood insurance program, and federal direct student loan and administrative costs.

(Updated April 1, 2002)

1. Why is it not possible to increase national security programs and preserve other programs? Answer using an economic concept.
2. If the government is the sole provider of national defense and domestic programs, and it wishes to avoid tax increases and budget deficits, what must it do in the face of pressures to increase both types of programs? Again, answer using an economic concept
3. Draw a production possibility curve showing the maximum amounts of national defense and domestic programs that can be provided given the government's budget.
a) Show where the federal government was before the budget. Show how that position will change if the budget is approved.
b) What will be the opportunity cost of reallocating spending?
c) As the resources allocated to defense programs continue to increase, will the opportunity cost of each equal increment increase, decrease or stay the same? Why?
Source JonathanWeisman, "Homeland-Defense Funds To Double In New Budget," USA Today, January 17, 2002.

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