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 16 th 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. 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. 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