Making Economic Policy in Congress (AEI studies)

Congress has been making economic policy since it first convened in 1789. The early congresses grappled with such pressing issues as repayment of the war debt and establishment of a national bank. Taxes and tariffs were recurring concerns, and every Congress had to appropriate funds for government agencies. The federal government was small in relation to the national economy; on the eve of the Great Depression in 1929, federal expenditures amounted to only about 3 percent of the gross national product (GNP). Because the government was small, it did not have a major role in steering the economy.

For most of its first 130 years, the United States was governed by a "fiscal constitution" that required balanced budgets except during emergencies such as war. This fiscal norm was supported by consensus about the government's limited role in economic management. The government had few options, but it also had few responsibilities. Business cycles came and went without causing much of a ripple in the trend line of federal revenues and expenditures. Congress did not rush to legislate whenever the nation experienced economic difficulties.

Although the government's economic role was progressively enlarged during the half-century after the Civil War, it was not until the depression and the New Deal that the national government came to be regarded as responsible for the performance of the economy. The "fiscal revolution" of the 1930s not only enlarged the relative size of the government-the budget has grown during the past 50 years from 3 to 25 percent of GNP-but also legitimized government intervention to sustain economic growth and ameliorate economic difficulty. No longer could the government remain on the sidelines and allow the economy to zigzag according to its own dynamics. Every president since Herbert Hoover has been judged by the performance of the economy. Although Ronald Reagan came to office in 1981 determined to shrink the federal government and reestablish free enterprise principles, he has staked his administration on the performance of the economy.

This book explores the many ways that Congress makes economic decisions. The first two chapters deal with overall policy, the middle chapters consider how Congress functions in a redistributive environment, and the next chapters address particular economic issues. The book concludes with an assessment of the implications of economic difficulties for Congress.