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Economic Policy

Economic Policy. Economic Theory. Laissez-Faire Theory that dominated American economic policy (or the lack thereof) in the early years Basic idea is that market will correct itself; cyclical Cycles of expansion, growth, contraction, recession

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Economic Policy

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  1. Economic Policy

  2. Economic Theory • Laissez-Faire • Theory that dominated American economic policy (or the lack thereof) in the early years • Basic idea is that market will correct itself; cyclical • Cycles of expansion, growth, contraction, recession • First attempt at government regulation was Interstate Commerce Commission in 1887 • Protect against big railroad • Sherman Anti-Trust Act of 1890 • Trust breaking, outlaws anticompetitive practices • Meat Inspection Act (1906) • USDA inspection of meat processing • Federal Reserve Act (1913) • Control inflation, establish U.S. currency

  3. Economic Theory • The Great Depression • Unemployment, bank failures, farm crisis, rapid deflation • FDR’s New Deal created programs that were intended to safeguard the economy • Keynesian Economics • Named for British economist John Maynard Keynes • Government could manipulate the economy through its level of spending. • Hard times – increase government spending • Boom – reduce government spending to “cool down” the economy • Difficulty is that once gov’t spending rises, cutting it later is politically difficult. (Example: entitlement reforms) • 1930s through the 1970s were marked by economic and social regulation

  4. Economic Theory • Supply-Side Economics • Response to stagflation of the late 1970s • Belief that Gross Domestic Product (GDP) is increased by increasing the supply of goods • Increase supply by cutting taxes and deregulating business • Trickle-down effect • Laffer Curve • Also called Reagonomics • Tax cuts without effective spending cuts led to deficit spending and tripled the national debt

  5. Fiscal Policy • Economic policies involved in government spending and taxing • Conducted by Congress and the President • Enacted through the federal budget

  6. The Federal Budget • Revenues • Income tax (48%) • Legalized by the 16th Amendment (1913) • Payroll taxes (35%) • Social Security and Medicare (Federal Insurance Contributions Act) • Corporate taxes (8%) • Tariffs (6%) • Excise taxes (2%) • Borrowing (the rest) • Selling Treasury bonds, savings bonds

  7. The Federal Budget

  8. The Federal Budget • Expenditures (Federal Spending) • Mandatory spending (54%) • Required spending by the federal government • Spending rates cannot be changed by Congress • Social Security, Medicare – entitlement programs • Interest on borrowing • Discretionary spending • Spending that can be altered by President and Congress • Defense, state grants, federal operations • Most discretionary spending goes to human resources (paying employees)

  9. The Federal Budget

  10. The Federal Budget • Executive Branch • Budget Account Act of 1921 • Delegated budget power to the President • Created the Office of Management and Budget (OMB) • Agencies submit budget requests to OMB based on previous year spending and expectations (inflation, spending changes) • President submits budget to Congress in January of year prior to fiscal year (October 1 – September 30)

  11. The Federal Budget • Legislative Branch • Congressional Budget Act of 1974 (procedural change) • President creates the budget, including revenues and expenditures • Budget is analyzed by the Congressional Budgeting Office (CBO) • Congress authorizes (various committees), appropriates funds (respective appropriations committees) and raises taxes (House – Ways and Means; Senate – Finance) • Input and lobbying from agencies for Congressional approval • Majority vote need in both houses to pass budget • Once passed, Government Accounting Office (GAO) ensures money is spent as legally prescribed

  12. The Federal Budget • Political Influences during budget process • Political party differences • Interest group influence/lobbying • Iron triangles • Public Opinion • Once appropriations bills are passed, President acts • Signs or vetoes entire bill • Deficit • Expenditures exceed revenues in a single budget • Debt • Collection of yearly deficits

  13. Iron Triangle

  14. Monetary Policy • Policies that involve control of the supply of money • Federal Reserve System created to control monetary policy • Central made up of twelve member banks • System is led by Board of Governors, led by Chairman appointed by the President (Ben Bernanke) • Controls the federal funds rate • Interest rate the Fed charges banks to borrow money, which determines bank interest rates

  15. Federal Reserve System

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