The Machinery of Economic Policy-Making Explain the role of Congress in economic policy making. What is the difference between fiscal policy and monetarism? How does the executive branch play a role in policy making? How is the Fed involved in policy making?

The Executive’s role Making economic policy decisions is complex and not under full presidential control –132 separate government bureaus are actually involved in formulating economic policy, among other groups Three people in the executive branch are special for this role, called the troika (Russian word for carriage pulled by three horses) –Chairman of Council of Economic Advisers (CEA) –Director of Office of Management and Budget (OMB) –Secretary of the Treasury

Council of Economic Advisers (CEA) Part of Executive Office since 1946 Group of professional economists sympathetic to president’s view of economics –Kennedy: Keynesian; Reagan: Supply/Monetarists –Prepares economic report for Prez to send to Congress each year Forecast economic trends, analyzes economic issues Favor reliance on the market

Office of Management and Budget (OMB) Part of Executive Office since 1939 (originally Bureau of the Budget) Chief function to estimate amount to be spent by federal agencies, negotiates dept. budgets, and that these match with prez’s program Part expert, non-partisan agency; part activist, partisan organization to implement prez’s wishes for bureaucracy

Secretary of the Treasury Member of Cabinet Drawn from or part of world of business/finance Chief job to argue point of view of financial community Provides estimates of gov’t’s revenue, changes from tax laws Represents nation with domestic bankers and the US to other nations

Congress The most important part of the economic machinery Approves all taxes and almost all expenditures of the federal gov’t—fiscal policy –Fiscal year: Oct. 1—Sept. 30 Consents to wage, price controls Can alter policy of “independent” Fed Board through legislation to reduce powers Committees also involved in setting economic policy (fragmentation) –House/Senate Budget committees –House/Senate Appropriations committees –House Ways and Means –Senate Finance Committee Each part of the system influenced by different economic theories and interest group involvement

The Federal Reserve’s role Executive/Legislative involvement in appointment and confirmation process of members Most important function is to regulate, as much as it can, supply of money (circulation and reserve rates) and the “price” of money (interest rates)