Transcript I. The Budget

Economic Policy
The Budget, the Fed, and a sundry
other important economic points
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I. The Budget
A.
B.
C.
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
1.
2.
3.
4.
D.
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
1. Placed responsibility for preparing budget on President
2. Created Bureau of the Budget (became OMB in 1970)
E.
Council of Economic Advisers—created in 1946
1. 3 economists advise president on maintaining a stable
economy
2. Helps president prepare annual economic report
3. Promotes the president’s policy goals
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I. The Budget Continued
F.
Budget Act of 1974
1.
2.
3.
4.
G.
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
1.
2.
3.
4.
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
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I. The Budget Continued
H.
Congress and the Budget Process
1.
2.
3.
4.
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
5. Portions of the budget are sent to authorization, tax, and
appropriations committees
a) Within the House and Senate, there are 35 committees
that can authorize spending according to their expertise
b) Appropriations committees allocate the funding
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II. Taxation
I.
The Politics of Taxation
1. Income tax authorized by 16th amendment (1913)
2. Tax rate lower in US than other democracies
3. Income tax burden is progressive; other taxes are
not
4. Tax loopholes—Client politics
a) Reformed by Tax Reform Act (1986)—low
rates, fewer deductions—entrepreneurial
politics
b) Reagan wanted to reduce taxes
c) Bush and Clinton both raised taxes
d) New loopholes created
5. Transfer payments
a) From wealthy to poor; economic equality
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III. The Fed (Federal Reserve Board)
A.
B.
C.
An independent agency est. in 1913 by
Federal Reserve Act
Primary job—monetary policy
Structure of the Fed
1. Board of Governors (aka FRB)
a)
b)
c)
d)
7 members; 14 year terms
Chairman (Ben Bernanke): 4 year terms
All appointed by President, confirmed by Senate
Responsibilities: set reserve requirements
2. FOMC (Federal Open Market Committee)
a) 12 members including FRB
b) 8 meetings/year to discuss monetary policy
c) 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)
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III. The Fed (Continued)
d) Buying—puts $ into circulation; interest rates drop
e) Selling—takes $ out; interest rates increase
f) This encourages or discourages borrowing and thus
business expansion
•
•
Lower rate=more borrowing=more $=inflation/stimulation
Higher rate=less borrowing=less $=slows inflation
g) Banks set “prime rate” based on the discount rate
•
This affects all money borrowed from a bank
h) Historically—combats inflation more than stimulates
economy:
•
“to remove the punch bowl when the party gets going”
3. 12 Regional Banks and 25 branches
a) Operate like the government’s banker
b) Responsibilities:
•
•
•
Store excess currency (reserves)
Settle checks and payments
Sell securities
c) 6,000 member banks
(See: http://money.howstuffworks.com/fed.htm)
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The Board of Governors
8
The FOMC
9
The Federal Reserve Banks
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Reserve Requirements
Too much of this
More
currency
leads
to…
11
Which leads the Fed to…
12
Money comes out of the
system, goes to Fed
Less $ in circulation
leads to higher interest
rates
13
But, if interest rates
climb too high…
14
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Now banks have
more money to loan
which drives down
Interest Rates
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In Summary…
The Fed affects monetary policy by:
1) Buying or selling securities
2) Changing the reserve requirements
3) Adjusting the discount rate
 All of these change the supply of
money and indirectly change the
interest rate
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