Definitions

• Deficit: spending exceeds revenue in a given year

• National debt: the accumulation of deficits over time

• Gross Domestic Product (GDP): all goods and services produced in an economy during a given year

• Inflation: the increase in the prices of goods and services over time

• Unemployment rate: the number of unemployed people expressed as a percentage of the total labor force

Federal Budget Deficit or Surplus, FY 1930–2023

National Debt

Gross Domestic Product

Inflation

Unemployment Rate

The Economy and Elections

• Politicians prioritize quick economic wins, especially before elections

• Government benefits often increase in election years

• Fixing one problem (e.g., unemployment) can worsen another (e.g., inflation)

• Presidents can lose elections due to economic downturns largely outside their control

• No perfect strategy exists for balancing inflation, taxes, and spending

Belief the Government Spends Too Much on Various Policies

Beliefs about the Tax System

Monetarism

Keynesianism

Planning

Supply-Side Economics

The Federal Reserve System: Monetary Policy

• Monetary policy: Manipulating the interest rate and money supply to influence the operation of the economy

• The Federal Reserve System: Federal Reserve Act of 1913

  • Federal Reserve Board: Seven governors, appointed by the president with Senate consent, serve non-renewable 14-year terms — removable only “for cause”
  • Fed Chairman: Chair of the board
  • 12 regional Federal Reserve Banks

The Federal Reserve System: Monetary Policy

• Twin goals of economic growth and low inflation

• Buys and sells securities (open-market operations)

• Regulates bank reserve requirements

• Sets the interest rate charged to banks

Why Fed Independence?

• Congress feared direct presidential control over monetary policy would produce a permanent inflationary bias timed to election cycles

• Ahead of the 1972 election, Nixon pressured Fed Chair Arthur Burns: “The Fed must loosen — it must risk inflation”

  • Burns complied — contributing to the inflation of the 1970s

Trump v. Cook (2026): Testing Fed Independence

• President Trump attempted to remove Fed Governor Lisa Cook “for cause,” citing mortgage fraud allegations

• The Court held 5-4 that Cook was entitled to notice and a hearing

• The Court declined to extend the Unitary Executive Theory to the Fed — citing its “unique historical status”

• Left the Fed’s independence in a provisional, not settled, state

Congress: Fiscal Policy

• Fiscal policy: The deliberate use of the government’s taxing and spending powers to stimulate or restrain the economy

• Government spending

• Taxes

• Some oversight of the Federal Reserve

• Foreign trade

• Must approve all taxes and almost all expenditures — no wage or price controls without its consent

Congress’s Power of the Purse

• Article I: Congress has the power to “lay and collect Taxes, Duties, Imposts and Excises”

• “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by law”

• No single piece of legislation creates “the budget” — a mix of permanent law, multi-year law, and annual appropriations

Mandatory vs. Discretionary Spending

• Mandatory spending (~61% of the budget): the authorizing law itself sets the funding — Social Security, Medicare, Medicaid, SNAP

• Discretionary spending (~26%): Congress sets funding annually through the appropriations process — defense, agency budgets

• The remainder: interest on the debt

• Mandatory spending is why cutting the federal budget is harder than it looks — most of it isn’t up for annual debate

Government Revenues and Expenditures by Type

Federal Taxes on Income, Top Percentage Rates, 1913–2023

The Budget Process

The President’s Budget Request

• Opens the annual cycle — nominally due the first Monday in February

• Developed through OMB and federal agencies, beginning the prior spring

• Signals the administration’s fiscal priorities across a ten-year window

The Congressional Budget Resolution

• A concurrent resolution — not signed by the president, and cannot be filibustered

• Sets spending ceilings and a revenue floor across 19 budget “functions”

• Due April 15 — but often passes late, or not at all

• Excludes Social Security’s trust fund

Appropriations and Shutdowns

• 12 annual appropriations bills fund discretionary programs, often combined into omnibus packages

• Appropriations have not been finished by October 1 in 42 of the last 45 years

• Missing the deadline requires a continuing resolution (CR) — funding at current levels for a set period

• Failing to pass a CR produces a government shutdown

Notable Government Shutdowns

• 2025: dispute over extending Affordable Care Act health insurance subsidies — 43 days, the longest in U.S. history

• 2018–19: border-wall funding dispute — 35 days

• 2013: Affordable Care Act funding dispute — 16 days

• 1995–96: Clinton-era shutdown — 21 days

Budget Reconciliation

• An optional, expedited process triggered by a “reconciliation directive” in the budget resolution

• Filibuster-proof: capped at 20 hours of debate, passes with a simple majority

• Constrained by the Byrd Rule — strips provisions deemed “extraneous” to spending/tax law unless 60 senators vote to waive it

• Cannot touch Social Security, and cannot increase the deficit beyond the resolution’s window unless offset

Reconciliation in Practice

• Originally conceived as a deficit-reduction tool — 16 deficit-reducing bills enacted, including the Inflation Reduction Act (2022)

• Increasingly used to increase the deficit: the Bush-era tax cuts (×3), the 2017 Trump tax cuts, 2021 COVID relief

• Congress now most often adopts a budget resolution specifically to unlock reconciliation — and skips one entirely when no reconciliation bill is planned

The Debt Limit

• A fixed statutory cap on Treasury borrowing — separate from the spending and revenue laws that create the government’s obligations

• When the limit binds, it conflicts directly with other legal payment obligations (contractors, employees, Medicare, veterans, interest on the debt)

The Debt Limit

• Congress has always raised or suspended the limit rather than default — but the process can be acrimonious

• Even the threat of default can dampen the broader economy

Globalization

Income Inequality

• The extent to which income is unevenly distributed throughout society

• Key causes: education gaps, job shifts from manufacturing to services, declining union membership

• Major policy proposals: universal pre-K, tax reform, the CHIPS Act