Download Fiscal Policy and the Federal Reserve

Fiscal Policy and the Federal
Reserve
Early History
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The United States government largely
adhered to free market practices
throughout the 18th and 19th century
The American economy was marked but
rapid growth during this time period, but
also periodic sometimes intense
downturns, frequently referred to as
“panics”; banking was not highly regulated
The Great Depression marked a giant shift
in the government’s role in the economy
beginning with the policies of Hoover and
greatly accelerating with the election of
FDR
FDR’s “new deal” was highly politically
controversial at the time, but is a political
norm now even if modern economists
don’t agree on its actual effects
Modern American politicians know they
will have a hard time getting re-elected if
they are seeing to be ignoring economic
problems; “it’s the economy stupid”
Taxing and Spending Policy
• Fiscal Policy: tool of economic
management by which
governments try to maintain
economic stability through
taxing and spending policies
• The annual federal budget is
the capstone of fiscal policy,
but is only one part of a larger
picture
• Budgets and budget proposals
are highly political documents;
budgets signal priorities
• Failure to agree on budgets is
increasingly common; govt.
shutdowns
• Rep. Paul Ryan (R-Wisconsin)
is regarded as a Republican
leader on budgetary policy
Keynesian Theory
• Economist John Maynard Keynes
wrote that in an economic
downturn business become
cautious and less likely to spend
• In order to reverse the economic
downturn the government should
increase its spending to help
increase economic activity; this
should even include deficit
spending
• Often referred to as “Keynesian
Theory” or “Demand Side
Economics”
• Best recent example is the
Obama Stimulus Bill
• Benefits and risks of this
economic model?
Supply-Side
• Supply-side economics:
emphasizes the business (supply)
side of the economy; cut taxes on
business, people, and investment
to encourage spending and
investment
• Supply-side economics was a
major component of the policies
of Presidents Kennedy, Reagan,
and Bush 43
• In theory the resulting economic
growth results in higher tax
returns which off sets the
temporary loss of tax revenue
from cutting the rates
• Best recent example is the Bush
tax cuts of the 2000’s
• Benefits and risks of this
economic model?
Monetary Policy
• Federal Reserve Act of 1913
created the Federal Reserve
System to manage the money
supply; major expansion of
government power
• Intended to help smooth out and
prevent the “panics” that had
been part of American economic
history and to better regulate the
country’s monetary system
• Members of the Federal Reserve
are appointed by the President
and confirmed by the Senate
• Monetary Policy: managing the
economy through manipulation
of the amount of money in
circulation
How Does Monetary Policy Work
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Fed has two primary goals:
– Maintain stable prices (control
inflation)
• Is inflation bad? Deflation?
Stagflation?
– Ensure maximum employment and
production output
• What does this mean?
– Are these goals always compatible?
How are these goals achieved?
– Changing the reserve rate
– Adjusting Interest Rates
Fed can adjust monetary policy more
easily than Congress can change fiscal
policy in most cases
– Impact of Congressional decisions on
the Fed?
Are they always correct?
Elitist institution? Who does the
Fed serve? Audits/Ron Paul?