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
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