Federal Budget & The Economy Notes

Fiscal Policy

  • Definition: The federal government’s efforts to manage the economy through its power to tax and spend.

Role of Congress

  • Holds the power of the purse (taxation, borrowing, and spending).

  • Also known as the power of appropriations.

  • Federal spending accounts for approximately 25% of GDP.

Role of the Executive Branch

  • Formulates and submits the budget to Congress.

  • The President is part of the process via veto power.

  • Troika (key economic advisors):

    • Council of Economic Advisers (CEA)

    • Treasury Secretary

    • Director of the Office of Management and Budget (OMB)

Budget Calendar

  • Fiscal Year: October 1st – September 30th.

Types of Federal Spending

Mandatory Spending (2/3 of Total Budget)

  • Entitlement Programs:

    • Social Security

    • Medicare

    • Medicaid (Means-tested; eligibility-based)

    • Food Stamps (SNAP) & Supplemental Security Income (SSI) (Means-tested)

  • Other mandatory spending:

    • Federal pensions & salaries

    • Interest payments on the national debt

Discretionary Spending

  • Defense spending: Largest portion, ~20% of budget.

    • Example: $11 billion for one aircraft carrier.

  • Non-defense discretionary spending:

    • Education

    • Infrastructure

    • Foreign aid

    • Other government programs

Economic Theories

Keynesian Economics (John Maynard Keynes)

  • Advocates for "pump priming"—government spending to boost the economy.

  • Example: FDR’s New Deal.

  • Suggests the government does not need to balance the budget annually.

Supply-Side Economics (Arthur Laffer)

  • Focus on tax cuts and deregulation.

  • Goal: Increase productivity and investment, leading to higher government revenue.

Monetarism

  • Centers on controlling the money supply to influence the economy.

Monetary Policy

  • Managed by the Federal Reserve (FED)—an independent central bank.

  • Tools of the Federal Reserve:

    1. Reserve Requirement: The amount banks must hold in reserve.

    2. Discount Rate (Federal Funds Rate): Interest rate for banks borrowing from the FED.

    3. Open Market Operations: Buying and selling government securities.

Social Security

  • A key part of mandatory spending.

  • Provides retirement and disability benefits.