Chapter 2

The Federal Reserve, Congress, and the Use of Context in Economic Policy*

This chapter discusses where context is currently used, such as Federal Reserve policy, and where context isn't used or, worse, is misused, such as in formulating tax policy and producing budgets.

In the previous chapter, we made the case that neither individuals nor executives look at the world the same way under all sets of economic circumstances. That we had to argue that context matters when it comes to the economic decisions of the average person is also a commentary on the way the world of economics sometimes works. It is just as odd that there are some who believe businesspeople think the same way whether their companies are booming or collapsing. But that is the way it is. We know, though, that context does matter to households and businesses.

But the reality that decisions have to be different given the context in which they are made is not limited to individuals and executives. Context is probably the most important concept in all aspects of the economy, especially public policy. That includes fiscal policy, which is the result of the many strange ways that Congress and the president come to an agreement on spending and taxing levels, as well as monetary policy, which is made by the Federal Reserve.

Public Policy Spreads a Wide Ripple

The importance of public policy is that it has a major impact on businesses and households. A healthy, vibrant private sector makes the U.S. economy hum, ...

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