Chapter 14 Economic Policy Basic Economic Issues Fiscal Policy Monetary Policy Deficit Spending Budget Process

Basic Economic Issues Government role in economic system Governments tools to control economic activity –Fiscal or monetary or both. –Protectionism –Free Trade Government regulating economic equality

Fiscal Policy Federal taxation and spending policy –Office of Management & Budget (OMB) Supply and Demand controls –Too much supply - low demand unemployment and recession/depression –Too much demand - low supply inflation causes prices to rapidly rise Keynesian Economics –Use of fiscal policy by government to maintain the correct balance between supply and demand to encourage stability

Monetary Policy Government control of money supply –Federal Reserve Board sets interest rates Supply of money Cost of money Monetarism –use of monetary policy to control supply and demand issues low interest rates will cause high demand high interest rates will cause supply to grow

Supply Side Economics Focuses on supply control Tax cuts encourage investment and capital growth Results in supply growth Gradually taxes grow with economic growth Liberals feel this increases economic inequality

Deficit Spending Spending more than revenue collected –2004 Revenue $1.4 Trillion –2004 Budget $1.8 Trillion –2004 Deficit $400 Billion Difference is made up by borrowing Deficit has grown over 40 years –1965 $1.4 Billion –1985 $200 Billion –2005 $390 Billion Congressional SpendingCongressional Spending National Debt –1965 $322 Billion –1985 $2 Trillion –2004 $7.4 trillion National Debt ClockNational Debt Clock

Major Components of 2005 Budget Social Security - $515 Billion Defense - $443 billion Interest on Debt - $375 billion Medicare - $290 Billion Medicaid - $193 Billion Sub Total - $1.816 Trillion

Mandatory versus Discretionary Spending Mandatory spending - increases every year without government appropriations –Social Security –Medicare –Medicaid –Unemployment Discretionary spending - spending on programs at the discretion of the Congress –Defense –Education –NASA

Budgeting Process Presidential Proposal Congressional Response Agency Expenditure of Funds

13-15 Budget Process

Presidential Proposal Fiscal Year - Oct 1st to Sept 30th Office of Management and Budget (OMB) Multi Year Planning/Proposal Process –April 2003 OMB begins 2004 Proposal –Feb 2004 Congress begins working 2004 Proposal OMB working 2004 with Congress and planning 2005 Agencies working on 2006 needs –Oct 2004 Agency have money to spend Line item veto option

Congressional Action Step One - Authorization –Numerous Substantive Committees decide to authorize and fund various discretionary agencies. –May be for one year, several years, or open-ended. –May be for specific amount or not to exceed cap Step Two - Appropriations (13 separate bills) –decision to fund an authorized program with specific sum of money. –Funding amounts authorized may be modified at this point. Congressional Budget Office

Agency Spending Oct 1st - funds are available for various bureaucratic agencies to spend. This assumes Congress finished appropriation process on time. Continuing resolution - legislative action allowing agencies to continue spending money based on previous budget because appropriations bills are not completed.

Major Changes to Process Congressional Budget & Impoundment Act –Created CBO –Moved fiscal year from Jul 1st to June 30th –Limited president from impounding(refusing to spend money) Gramm-Rudman-Holling –required annual reduction in deficit to balanced budget in –Declared unconstitutional by Supreme Court

Major Changes to Process Budget Enforcement Act –redesign of Gramm - Rudman –limiting by capping discretionary spending –mandatory program increases had to be balanced by cuts in discretionary spending or increased taxes Balanced Budget Amendment –House voted to amend the Constitution to require a balanced budget –Senate failed to achieve a 2/3 majority by one vote.