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 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

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

Economic TheorySupply-Side Economics

Response to stagflation of the late 1970sBelief 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 ReagonomicsTax cuts without effective spending cuts led to

deficit spending and tripled the national debt

Fiscal PolicyEconomic policies involved in government

spending and taxingConducted by Congress and the PresidentEnacted through the federal budget

The Federal BudgetRevenues

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

The Federal Budget

The Federal BudgetExpenditures (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)

The Federal Budget

The Federal BudgetExecutive 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)

The Federal BudgetLegislative 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

The Federal BudgetPolitical Influences during budget

processPolitical party differencesInterest group influence/lobbyingIron trianglesPublic Opinion

Once appropriations bills are passed, President actsSigns or vetoes entire bill

DeficitExpenditures exceed revenues in a

single budgetDebt

Collection of yearly deficits

Iron Triangle

Monetary PolicyPolicies that involve control of

the supply of moneyFederal Reserve System created

to control monetary policyCentral made up of twelve

member banksSystem 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

Federal Reserve System