Question

1. Detail the function of the congressional office created by the 1974 Congressional Budget and Impoundment Act.
2. The Great Depression challenged the laissez-faire economic approach. Roosevelt sought to implement a new approach known as Keynesian economics. Describe what this is and the effect it has on the U.S. economy.

Answer 1

The Congressional Budget and Impoundment Control Act of 1974, was signed into law creating the House Budget Committee on this date. The bill overhauled theBudget and Accounting Act of 1921, which had been intended to assist Congressin its appropriations role by requiring the President to submit an annual budget.The 1974 Congressional Budget and Impoundment Control Act modified the role of Congress in the federal budgetary process. It created standing budgetcommittees in both the House and the Senate, established the Congressional Budget Office, and moved the beginning of the fiscal year from July 1 to October 1.

The Act had two main goals: (1) strengthen and centralize Congress' budget authority; (2) reduce the President's impoundment authority. The latter was done by drafting detailed guidelines restricting how the President can impound funds already appropriated by Congress. The former—which has proven the more significant of the two—was done through a variety of means. The Act created the Congressional Budget Office (CBO) to give Congress independent economic analysis and end the Executive Branch's monopoly on budgetary information created by the 1921 Budget and Accounting Act. It created standing budget committees in both the House and the Senate, provided for greater numbers of staff for these and other committees involved in budget decisions, and made changes in the procedure of passing a budget. The new budget committee was required to pass a ‘concurrent budget resolution' (to be passed by Congress no later than May 15) outlining the government's overall expenditures and receipts, based on CBO estimates. The concurrent resolution would then serve as the blueprint for the regular work of the authorizing and appropriating committees as they drafted the budget.

The long-term effects of the Congressional Budget Act are in dispute. Iwan Morgan argues the Act shifted budgetary leadership to the Congress, which exacerbated the problems inherent in that institution by creating unrealistic deadlines and demanding a level of coordination of which Congress is incapable.

During the Great Depression of the 1930s, existing economic theory was unable either to explain the causes of the severe worldwide economic collapse or to provide an adequate public policy solution to jump-start production and employment.

British economist John Maynard Keynes spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment—that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands (see box). The main plank of Keynes’s theory, which has come to bear his name, is the assertion that aggregate demand—measured as the sum of spending by households, businesses, and the government—is the most important driving force in an economy. Keynes further asserted that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists justify government intervention through public policies that aim to achieve full employment and price stability.

The revolutionary idea

Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries). Any increase in demand has to come from one of these four components. But during a recession, strong forces often dampen demand as spending goes down. For example, during economic downturns uncertainty often erodes consumer confidence, causing them to reduce their spending, especially on discretionary purchases like a house or a car. This reduction in spending by consumers can result in less investment spending by businesses, as firms respond to weakened demand for their products. This puts the task of increasing output on the shoulders of the government. According to Keynesian economics, state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle.

There are three principal tenets in the Keynesian description of how the economy works:

• Aggregate demand is influenced by many economic decisions—public and private.Private sector decisions can sometimes lead to adverse macroeconomic outcomes, such as reduction in consumer spending during a recession. These market failures sometimes call for active policies by the government, such as a fiscal stimulus package (explained below). Therefore, Keynesian economics supports a mixed economy guided mainly by the private sector but partly operated by the government.

• Prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor.

• Changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase. Keynesian models of economic activity also include a multiplier effect; that is, output changes by some multiple of the increase or decrease in spending that caused the change. If the fiscal multiplier is greater than one, then a one dollar increase in government spending would result in an increase in output greater than one dollar.