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Economic Policy

Economic Policy. The Budget, the Fed, and a sundry other important economic points. I. The Budget. In Theory: how much will be collected in taxes, and how that $ will be spent on programs In Fact: a list of what will be spent on what Before 1921 Congress prepared “budget” alone

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Economic Policy

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  1. Economic Policy The Budget, the Fed, and a sundry other important economic points

  2. I. The Budget • In Theory: how much will be collected in taxes, and how that $ will be spent on programs • In Fact: a list of what will be spent on what • Before 1921 • Congress prepared “budget” alone • Highly decentralized process; many committees involved • Committees could increase or decrease amounts at will • President simply approved appropriations bills • Budgeting and Accounting Act of 1921 • Placed responsibility for preparing budget on President • Created Bureau of the Budget (became OMB in 1970) • Council of Economic Advisers—created in 1946 • 3 economists advise president on maintaining a stable economy • Helps president prepare annual economic report • Promotes the president’s policy goals

  3. I. The Budget Continued • Budget Act of 1974 • Further organized budget process; Congress retook power • Budget resolutions est. ceilings for spending areas • Created CBO • Committees approve appropriations; Congress passes them; President signs • Office of Management and Budget • Located within Executive Office of the President • Director appointed by president, approved by Senate • Staff of over 500—they begin budget process in spring by meeting with the president • Based on president’s priorities, the OMB assembles a budget by working with agencies. The OMB scrutinizes agencies’ requests

  4. I. The Budget Continued • Congress and the Budget Process • Budget must be approved by Congress • Budget Committees (2) review the whole budget • CBO—analyzes and makes proposals • Budget Resolution—used to propose budget ceilings—Congress adopts these to guide future work on the budget • Portions of the budget are sent to authorization, tax, and appropriations committees • Within the House and Senate, there are 35 committees that can authorize spending according to their expertise • Appropriations committees allocate the funding

  5. II. Taxation • The Politics of Taxation • Income tax authorized by 16th amendment (1913) • Tax rate lower in US than other democracies • Income tax burden is progressive; other taxes are not • Tax loopholes—Client politics • Reformed by Tax Reform Act (1986)—low rates, fewer deductions—entrepreneurial politics • Reagan wanted to reduce taxes • Bush and Clinton both raised taxes • New loopholes created • Transfer payments • From wealthy to poor; economic equality

  6. III. The Fed (Federal Reserve Board) • An independent agency est. in 1913 by Federal Reserve Act • Primary job—monetary policy • Structure of the Fed • Board of Governors (aka FRB) • 7 members; 14 year terms • Chairman (Ben Bernanke): 4 year terms • All appointed by President, confirmed by Senate • Responsibilities: set reserve requirements • FOMC (Federal Open Market Committee) • 12 members including FRB • 8 meetings/year to discuss monetary policy • Responsibilities: • Set securities rate—the rate member banks buy and sell government securities • Set discount rate—the rate the Fed charges banks for loans (aka interest rate)

  7. III. The Fed (Continued) • Buying—puts $ into circulation; interest rates drop • Selling—takes $ out; interest rates increase • This encourages or discourages borrowing and thus business expansion • Lower rate=more borrowing=more $=inflation/stimulation • Higher rate=less borrowing=less $=slows inflation • Banks set “prime rate” based on the discount rate • This affects all money borrowed from a bank • Historically—combats inflation more than stimulates economy: • “to remove the punch bowl when the party gets going” • 12 Regional Banks and 25 branches • Operate like the government’s banker • Responsibilities: • Store excess currency (reserves) • Settle checks and payments • Sell securities • 6,000 member banks (See: http://money.howstuffworks.com/fed.htm)

  8. The Board of Governors

  9. The FOMC

  10. The Federal Reserve Banks

  11. Reserve Requirements Too much of this leads to… More currency

  12. Which leads the Fed to…

  13. Money comes out of the system, goes to Fed Less $ in circulation leads to higher interest rates

  14. But, if interest rates climb too high…

  15. Now banks have more money to loan which drives down Interest Rates

  16. In Summary… • The Fed affects monetary policy by: • Buying or selling securities • Changing the reserve requirements • Adjusting the discount rate • All of these change the supply of money and indirectly change the interest rate

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