Public Finance, Taxation, and Monetary Policy

SIC 9311

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Industry report:

This industry classification includes government establishments primarily engaged in financial administration and taxation, including monetary policy; tax administration; collection, custody, and disbursement of funds; debt and investment administration; government employee retirement and other trust funds; and the like. Income maintenance program administrations are classified in SIC 9441: Administration of Educational Programs. Government establishments primarily engaged in regulation of insurance and banking institutions are classified in SIC 9651: Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors.

Industry Snapshot

The economic policy in the United States is determined by a complex web of organizations representing both the legislative and executive branches of government. The economic policies covered in this classification can be broadly divided into fiscal policies and monetary policies.

Fiscal policy is the policy of a government with respect to taxation, the public debt, public expenditures, and fiscal management. These policies serve to stabilize the national income of a country. In the United States, a policy of stability and growth has traditionally been pursued. The Employment Act of 1946 explicitly required the government to create and maintain "useful employment opportunities, including self-employment" and to promote production and a high standard of living in a manner that is consistent with free enterprise. The fiscal policy of the United States is determined and implemented by the Congress and the president by changing deficit expenditures or federal tax rates. Fiscal policies can be expansionary or contractionary. Expansionary policies can take the form of either a decrease in tax rates that increases private sector expenditures or an increase in government spending. Contractionary policies are decreases in deficit spending caused by either an increase in tax rates that decreases private expenditures or a decrease in public expenditures.

Monetary policies are government policies that relate to the supply or use of money. This policy is implemented through the control of credit exercised through the central banking authority. Typically, the objective of a monetary policy is to achieve price stability in the economy. In the United States, monetary policy is controlled by the board of governors of the Federal Reserve. The instruments used in the implementation of monetary policy include open market operations and variations in rates for rediscounts, loans, and advances in the legal reserve requirements. All these have an impact on both the availability and cost of bank credit.

In setting its policies, the Federal Reserve Board looks at three measures of money. The first is called M1 and refers to the currency in the hands of the public, demand deposits, and interest-bearing checking accounts. Second is M2, which includes assets in M1 plus all deposit liabilities of depository institutions, money market funds, overnight repurchase agreements, and overnight Eurodollars. Third is M3, which includes M2 plus large denomination time deposits, term Eurodollars, and all other repurchase agreements. Broad measure of liquid assets, L, is also regularly reported by the Federal Reserve.

According to industry statistics, 1,740 finance, taxation, and monetary policy establishments in 2009, which accounted for approximately one-third of the overall industry and employed 118,600. Other industry subsectors included property tax assessor's offices, government taxation departments, and government treasurer's offices.

Organization and Structure

The organizations responsible for public finance, taxation, and monetary policy can be divided into two categories: government agencies and legislative committees. The various agencies and departments are primarily responsible for implementing policy measures. The most important agencies are the Commerce Department, the Congressional Budget Office, the Council of Economic Advisors, the Federal Reserve System, the Internal Revenue Service, the Office of Management and Budget, Small Business Administration, the Treasury Department, and the U.S. Trade Representative. The most important legislative committees are the House Banking and Finance Committee; the House Budget Committee; the House Ways and Means Committee; the Joint Economic Committee; the Joint Taxation Committee; the Senate Banking, Housing, and Urban Affairs Committee; the Senate Budget Committee; and the Senate Finance Committee.

The Commerce Department.
The U.S. Commerce Department provides business and government with relevant economic statistics research and analysis. The Commerce Department acts as the principal advisor to the president on federal policy affecting industry and commerce. The department develops and maintains macroeconomic models and other analytical tools necessary to analyze economic policy issues such as the effect of federal legislation, regulations, and programs. The department also promotes national economic growth and development, competitiveness, international trade, and technological development. As one of the government's main sources of economic data, the Commerce Department maintains the Economic Bulletin Board; the National Trade Data Bank; and the National Economic, Social, and Environmental Data Bank.

Created on March 4, 1913, the Commerce Department is headed by the secretary of commerce and is divided into five sections--each headed by an undersecretary. These sections are the National Oceanic and Atmospheric Administration (NOAA), the International Trade Administration (ITA), the Bureau of Export Administration, Economic Affairs, and the U.S. Travel and Tourism Administration. In the late 2000s, the Commerce Department managed a budget of $6.5 billion and had approximately 38,000 employees.

The Congressional Budget Office.
The Congressional Budget Office (CBO) is a nonpartisan office that provides the House and Senate with budget-related information and analyses of fiscal policies. The CBO does not make policy recommendations but limits its activities to presenting options for consideration. The Balanced Budget and Emergency Deficit Control Act of 1985, also known as the Gram-Rudman-Holings Law, assigned the CBO the additional tasks of reporting whether the projected federal deficit exceeds the legal limits, calculating the amount of excess that must be removed to eliminate any deficit excess, and alerting the Congress to a recession in the economy that might require the suspension of deficit targets.

The CBO is divided into six divisions, each administered by a director and a deputy director. The directors are appointed to four-year renewable terms by the Speaker of the House and the president pro tempore of the Senate based on the recommendation of both budget committees. The CBO budget in fiscal 2009 was $45.2 million.

The Council of Economic Advisors.
The Council of Economic Advisors (CEA) is comprised of three members and a supporting staff of economists. The CEA advises the president on economic developments, trends, and policies, as well as preparing the Economic Report of the president for Congress. The CEA was established by the Employment Act of 1946 and is an agency within the executive office of the president. The members are appointed by the president with the advice and consent of the Senate.

The Federal Reserve System.
The Federal Reserve System is responsible for setting U.S. monetary policy. The system is the central banking structure of the United States and was created by the Federal Reserve Act in 1913. It influences credit conditions through buying and selling treasury securities in the open market, fixing the amount of reserves depository institutions must maintain and determining interest rates. The Federal Reserve Board chairman and vice chairman are appointed by the president for four year terms. The remaining seven members of the board are appointed for 14-year terms.

The Internal Revenue Service.
The primary responsibility of the Internal Revenue Service (IRS) is the administration and enforcement of internal revenue laws except those related to firearms, alcohol, and tobacco. The IRS is a division of the Department of the Treasury and was established in 1962. The IRS develops national policies and programs for the administration of Internal Revenue laws.

The Office of Management and Budget.
The Office of Management and Budget (OMB) prepares the president's annual budget and works with the CEA and Treasury Department to develop the government's fiscal program and oversee the administration of the budget. The OMB also reviews government regulations and coordinates administration procurement and management policy.

The Small Business Administration.
The Small Business Administration (SBA) promotes small business interests through financial aid, counseling, and ensuring that small businesses receive a fair portion of government contracts. The SBA is also involved in loan programs for small businesses. The agency acts in two manners: it can lend money directly to the small business, or it can cosign a loan through a lender.

The Treasury Department.
The U.S. Treasury Department formulates and recommends domestic and international financial, economic, tax, and broad fiscal policies and manages the public debt. The Treasury Department is the chief financial department of the government and advisor to the president on economic policy. The Treasury Department also serves as the government's primary financial manager, taking responsibility for cash management and investment of government trust funds, credit administration, and debt collection. The Treasury Department was created on September 2, 1879, and is overseen by the secretary of the Treasury, a cabinet officer appointed by the president.

The U.S. Trade Representative.
This office is a cabinet-level agency within the office of the president. The U.S. Trade Representative acts as the president's chief advisor on international trade policy, has the primary responsibility for developing international trade policy and coordinating its implementation, and is chief negotiator for international trade agreements. The office of the U.S. Trade Representative was created by the Trade Expansion Act of 1962 to negotiate all trade agreements on behalf of the United States.

The various legislative committees are responsible for setting economic policy through legislation. A brief discussion of each of the committees follows:

The House Banking, Finance, and Urban Affairs Committee.
This committee has jurisdiction over legislation dealing with domestic monetary policy, including the Federal Reserve System. This committee also oversees financial aid to commerce and industry, measurement of economic activity, federal loan guarantees, economic development, and economic stabilization measures.

The House Budget Committee.
The House Budget Committee exercises jurisdiction over congressional budget resolutions that fix levels for federal spending, revenues, deficit, and debt. The committee also has jurisdiction over reconciliation bills, which modify existing programs to meet budget goals.

The House Ways and Means Committee.
The House Ways and Means Committee exercises jurisdiction over legislation dealing with the debt ceiling, investment policy, and taxes. The committee oversees the Internal Revenue Service and sets excise tax rates for the Bureau of Alcohol, Tobacco, and Firearms.

The Joint Economic Committee.
The Joint Economic Committee studies and makes recommendations on economic policy, including fiscal policy. The committee also maintains data on aggregate economic activity.

The Joint Taxation Committee.
The Joint Taxation Committee performs staff work for the House Ways and Means and Senate Finance Committees on domestic and international tax matters in the Internal Revenue Code, the public debt limit, and savings bonds. It also provides those committees with general economic and budgetary analysis and provides revenue analysis for all tax legislation.

The Senate Banking, Housing, and Urban Affairs Committee.
The Senate Banking, Housing, and Urban Affairs Committee exercises jurisdiction over legislation dealing with bank regulation, domestic monetary policy, financial aid to commerce and industry, the measurement of economic activity, federal loan guarantees, and economic stabilization measures. The committee also oversees the Federal Reserve System.

The Senate Budget Committee.
The Senate Budget Committee exercises jurisdiction over congressional budget resolutions, which set levels for federal spending, revenues, deficit, and debt. It also exercises jurisdiction over reconciliation bills, which modify existing programs to meet budget targets, and oversees the Congressional Budget Office.

The Senate Finance Committee.
The Senate Finance Committee exercises jurisdiction over tax legislation. It oversees the Internal Revenue Service and sets excise tax rates for the Bureau of Alcohol, Tobacco, and Firearms.

Background and Development

On March 4, 1951, the board of governors of the Federal Reserve System and the Treasury Department reached an accord that established the coordination of monetary and fiscal policy in the United States. This was to be done in a manner consistent with the independence of monetary policy. The accord stated that the two offices had reached agreement with respect to debt management and monetary policies to be pursued in furthering their common purpose--to assure the successful financing of the government's requirements and, at the same time, minimize monetization of the public debt.

The beginning of the Korean War in June of 1950 increased the government's requirements for debt financing. This increased the importance of a treasury policy that would ensure the availability of low-cost borrowing, stable money rates, adequate bank reserves, and stable markets for government securities.

The Federal Reserve System has tried to gain greater control over monetary policy. On October 6, 1979, the board of governors announced a new series of programs that would "assure better control over the expansion of money and bank credit," curb speculation, and thus dampen inflationary forces. These policy objectives were met by placing greater emphasis on the supply of bank reserves and less emphasis on limiting fluctuations in the federal fund rates.

The early 1990s were marked by widespread public discontent with the economic policies of the U.S. government. Years of slow growth and recession were seen as indicators that new policies should be developed and implemented. This sentiment was reinforced by the end of the Cold War and the resulting belief that American economic resources could be better deployed. The election of 1992 brought a Democrat to office for the first time in 12 years, largely on a platform that stressed new economic priorities and policies. That year also saw the political appearance of Ross Perot, who gained popularity by stressing the need to change U.S. economic policy for good reason: the federal deficit hit an all-time high of more than $290 billion dollars in 1992.

The nation entered the millennium with a balanced budget, an accomplishment first achieved in 1998, following years of overspending. In 1999, revenues totaled $1.8 trillion and expenditures were $1.7 trillion, resulting in a surplus of $124.6 billion. In 2000, revenues were $2.0 trillion and expenditures amounted to $1.8 trillion, resulting in a surplus of $236.4 billion.

All in all, 1999 was a very good year, according to the Federal Reserve Board's Humphrey-Hawkins Report. Economic expansion had moved into its ninth straight year, and unemployment was the lowest since 1970, at approximately 4 percent. Real gross domestic product was annualized at better than 4 percent growth, and stock indexes set world records in 1999--the Dow Jones Industrial Average breaking 10,000 points for the first time in history. Federal Reserve Board Chairman Alan Greenspan became a household name, as he carefully kept inflation in check by adjustments to the interest rate, and an aging America overwhelmingly supported extra protection for funds intended to keep the Social Security trust fund solvent.

In the early 2000s, the nation's budget surplus began to dwindle. In 2001, revenues of nearly $2.0 trillion and expenditures of almost $1.9 trillion resulted in a budget surplus of $127.3 billion. In 2002, a deficit reappeared as revenues were less than expenditures of about $2.0 trillion. This amounted to a $157.8 billion shortfall. The U.S. government budget for fiscal year 2004 estimated that a deficit would exist through 2008. During that timeframe, the shortfall was projected to reach a high of $307.4 billion in 2004.

On the revenue side, the federal government gained about $858 billion dollars from personal income taxes and more than $148 billion from corporate income taxes in 2002. When added to miscellaneous federal taxes such as excise, estate, and gift, custom duties and fees, and so on, total federal revenues were nearly $1.9 trillion that year.

Where does all the money go? In 2002, the budget for the Department of Health and Human Services was nearly $466 billion; the Department of the Treasury was to receive more than $370 billion; and the Department of Defense budget was almost $332 billion. On the other hand, the Department of Agriculture was budgeted for nearly $69 billion; the Department of Labor, about $65 billion; and the Department of Justice, just $21 billion. The list goes on.

The United States suffered from weak economic conditions in the early 2000s. Although a small amount of economic growth did occur in 2002, tax reductions by the Bush administration and an increase in government spending took their toll on the budget. Significant spending increases have occurred recently in the areas of homeland security and defense, stemming from the nation's response to terrorist threats and the U.S. military's involvement in Iraq. In the wake of the budget deficit, federal contributions to national savings fell, and the national savings rate dropped to 15 percent of the gross domestic product in late 2002. This was the lowest rate since the 1940s.

In 2003, Congress was on the verge of approving a tax-cut package that included $330 billion of tax cuts and $20 billion of aid to financially struggling states over the course of 10 years. The plan would provide $226 billion in the first two years, offering what many Republicans lauded as a much-needed stimulus to a the country's weak economy. President Bush claimed it would help to create much-needed jobs. However, many Democrats were concerned about the rising national debt and called the plan irresponsible. They argued that the plan benefited the wealthy at the long-term expense of the working class. Among the provisions of the plan, which was approved by the House on May 22, 2003, were a reduction of the highest tax rate from 38.6 percent to 35.0 percent, tax reductions on capital gains and dividend income, and an increase of the child tax credit from $600 to $1,000 in the years 2003 and 2004 for those with children under the age of 17.

Following the release of President Bush's 2006 budget, it was apparent that the war on terror remained the top priority when it came to the disbursement of funds. In 2006, the budget for the Department of Health and Human Services was $67.2 billion, down from an estimated $466 billion in 2002. The Department of the Treasury budget fell from $370 billion to $11.6 billion in 2006, as did the Department of Labor's, which decreased 4 percent to $11.5 billion. The Department of Defense budget increased 5 percent over 2005, to $419.3 billion, while the Department of Justice budget stood at $20.3 billion.

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005, thus extending the 2003 tax reductions on capital gains and dividend income through 2010, in an effort to sustain economic expansion and promote job growth. Since its implementation in 2003, businesses were once again investing at more than 9 percent annually, which in turn led to job growth of 5.2 million.

The House Budget Committee approved the Legislative Line Item Veto Act of 2006 (H.R. 4890), initially introduced by Congressman Paul Ryan (R-WI), which, if approved in the Senate, would further cut the budget deficit and deter unnecessary spending. In addition, the Federal Funding Accountability and Transparency Act of 2006 (S. 2590) was enacted by Congress. "This legislation demonstrates Congress' commitment to giving the American people access to timely and accurate information about how their tax dollars are spent," according to the President Bush. In 2008, then-Senator Obama, along with Senators Carper, Coburn, and McCain, introduced the follow-up legislation Strengthening Transparency and Accountability in Federal Spending Act of 2008, but the bill stalled in committee.

Current Conditions

In the late 2000s, the Federal Reserve came under fire for failing to rein in banks who engaged in subprime lending--in other words, loaned money to less-than-highly qualified candidates--which ultimately led to a crash of the subprime lending market and to thousands of foreclosures around the country. In response, Texas Rep. Ron Paul authored the Financial Stability Improvement Act of 2009, backed by a bipartisan group of over 300 House members, that would subject the Federal Reserve to audits by the Government Accountability Office (GAO). On December 2, 2009, the bill passed out of the House Financial Services Committee. The bill, if passed, would allow the GAO, a nonpartisan investigative branch of the federal government, to examine the Fed's handling of monetary policy, as well as its lending practices and relations with foreign central banks--all of which are not transparent, given the Fed's dual role as a function of both government and the banks.

The bill's proponents suggest that the bill simply ensures better transparency and oversight, and lessens the chances of another subprime lending debacle. The bill's opponents cite Rep. Paul's oft-stated desire to do away with the Fed completely and suggest that more congressional oversight may hamper the Fed's ability to do its job unencumbered by political pressures. The Economist (US) noted in 2009, "Americans and Congress are upset about reckless bankers, failed regulators and bail-outs. The Fed makes a proxy for all three." Although it was unclear whether the bill would make it off the House floor or through the Senate, it did reflect the negative sentiment felt across both aisles toward the Fed.

While Congress was in the mood to limit the Fed's powers--Senate Banking Committee chair Chris Dodd introduced a bill in 2009 that would strip the Fed of its ability to regulate banks--President Obama was looking to expand the Fed's role. President Obama wanted to give the Fed the job of supervising large financial firms, (e.g., investment banks), which currently fall outside government banking regulation. However, it appeared to be an uphill battle. Kristin Brost, a spokeswoman for the Senate Banking Committee, told the Los Angeles Times in October 2009, "There just aren't a lot of cheerleaders here for expanding the authority of the Federal Reserve."

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