AP ® Government and Politics – United States: Monetary and Fiscal Policy and the 2009 Economic...

AP® Government and Politics – United States: Monetary and Fiscal Policy and the 2009 Economic Recession

with Gary Copeland

www.collegeboard.com


Today’s Presenter

Gary Copeland

Professor of Political ScienceUniversity of OklahomaChief Reader for AP®

Government and Politics


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Welcome

Who is with us today?

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Learning Objectives

At the close of this workshop participants will be able to:

• explain to students how both monetary and fiscal policy are created.

• demonstrate the role U.S. Budget plays in fiscal policy.

• analyze the difficulties in creating the federal budget and controlling federal deficits.

• develop strategies for using events surrounding the economic recession of 2008 to teach about monetary and fiscal policy.


Learning Objectives

Students of workshop participants will:

• understand monetary and fiscal policies and how they are made.

• understand the basics of the budgeting process and the associated challenges.

• understand the key elements of the U.S. federal budget.

• Understand how and why the Federal Reserve Board (the Fed) is independent.


Session Topics

• The history of the role of government in managing the economy.

• Fiscal policy as a method to manage the economy.

• Budgeting and fiscal policy.

• An overview of the budgeting process and timetable.

• An overview of the federal budget.

• An exercise for teaching about the budget.

• About monetary policy.

• The Bush crash – fiscal and monetary responses.


Place in the Course

Where does monetary and fiscal policy fit in the AP® Government and Politics U.S. Course?

• This topic is generally considered part of public policy.

• This topic is also effective in teaching across the curriculum.

• The Congress

• The President

• The impact of bureaucracies


The history of the role of government in managing

the economy.

• Economic Interpretation of the Constitution

(Charles Beard)

• Hamilton – Report on Manufacturers

• A minor role in the19th century


• Creation of Federal Reserve Board (1913)

• President’s Budget (1921)

• Turning point of the Great Depression

• Congressional Budget and Impoundment

Control Act (1974)

The history of the role of government in managing

the economy.


Monetary Policy

U.S. monetary policy regulates the money supply

and interest rates to control inflation and stabilize

the economy to achieve national economic goals.

This policy affects the cost of and availability of

money and credit which in turn influences how

much is spent by individuals and businesses.


Monetary Policy

Monetary policy is set by Federal Reserve Board

(“The Fed”), or more precisely, its Federal Open

Market Committee. The Federal Reserve Act calls

for the Fed to “promote effectively the goals of

maximum employment, stable prices, and

moderate long-term interest rates."


Monetary Policy Theory

When the real cost of money (and credit) is low:

• Businesses and individuals are more likely to invest and

spend.

• This climate promotes demand.

• Demand promotes economic growth.

• Economic growth promotes more employment.

• Economic growth promotes higher wages.

The Cost of Money



When the real cost of money (and credit) is too low:

• Demand can begin to outstrip productive capacity.

• When demand increases the supply can become

inadequate.

• Concern about the value of money and credit (the

cost) in the future may increase.

• This may produce higher prices (inflation).

The Cost of Money



The goal is to find the right balance

between the cost of money and supply and

demand — the right balance of economic

growth.

The Cost of Money


Why the Fed (and not the President and

Congress)?

• There was a general belief that a centralized policy

is necessary.

• Independence keeps politics out of its decisions.

• … relatively, at least.

• The Fed has expertise.

• There are long terms for its leadership.

• Members are appointed by president and confirmed by Congress.

• The Fed largely controls its own budget.

How is Fed Independence Achieved?


The Fed’s Major Tools

• Open market operations (buying and selling government securities).

• Discount rates what it charges banks to lend them money.

• Reserve requirements for banks.

• The Fed functions as both a central bank and an independent regulatory commission.


Fiscal policy as a way to manage the economy

budgeting.

• The definition of fiscal policy.

• The theory behind fiscal policy.

• Budgeting as fiscal policy, but also a

statement of policy priorities.


Fiscal Policy

The use of government spending and taxation

to influence the economy. Both the levels and

allocation of spending and taxation can

influence economic outcomes — at the

aggregate and within sectors of the economy.


Fiscal Policy Theory

During slow economic periods the government can lower

taxes and/or increase spending as a way to encourage

economic expansion. These strategies would produce

increased deficits. Specific programs, such as public works,

can be targeted, or, the government may rely on aggregate

levels of activity to produce stimulation.

Some programs are automatic, such as unemployment,

while others are ad hoc. The same points can be made on

the revenue side. The opposite types of activities can be

utilized to slow economic expansion during periods of

inflation.


Fiscal Policy Challenges

• it is a blunt tool with low predictability of both results and the time frame for its impact.

• the fact is that when deficits are financed through borrowing, the net effect is minimized because money is simply moved from the private sector to the public sector.

• its use influences the value of the dollar in the monetary exchange market, minimizing the effect in a globalized economy.

• the fact is that there are many budget constraints (such as mandatory or defense spending) that jeopardize the effectiveness of fiscal policy.

Some argue that fiscal policy is ineffective because:


Budgeting

• What the government takes in as revenues and what is spent and how.

• A statement of priorities (we spend on what we think is important).

The Federal budget is:


Budgets are Plans

• The President has a plan.

• Congress has a plan.

• There is no single, overall plan that is the federal budget that determines outcomes.

• The term “Budget” is also used to refer to the outcomes of past decisions so we can talk about the 2005 budget, for example, as the final outcome of all budget-related decisions and expenditures.


Key Elements of the Federal Budgeting

Process• About a year-and-a-half out, agencies prepare

requests that over time are aggregated up the chain and ultimately go to the Office of Management and Budget (OMB).

• The President’s budget is presented in January or February.

• The Congressional budget is presented in the late summer.


Key Elements of the Federal Budgeting

Process• The appropriations process starts after the

Congressional budget and continues until the start of the fiscal year, more-or-less. The federal fiscal budget year begins October 1 for the next year.

• The end game:

• reconciliation

• continuing resolutions (CRs), and

• omnibus legislation


Reconciliation

• … is Congress’ best tool for controlling “uncontrollable spending.”

• Budget Resolution may call for committees to cut mandatory spending.

• These cuts are combined into a single piece of legislation and given and up or down vote.


Continuing Resolutions

• At the start of the fiscal year, it is common for some appropriations bills to remain in process.

• Rather than shut down government, Congress passes CRs that continue operations (generally) as they were last year.

• CRs often combine multiple Appropriations areas into a single CR.

• Sometimes CRs are in place for the entire fiscal year.


Omnibus Legislation

• … is legislation that combines a large number of bills together into a single piece of legislation.

• Vehicles for this include reconciliation, CRs, and a combination of appropriations bills.

• As these are often “must pass” bills, they often become vehicles for a variety of issues.

• Members, then, are forced to vote yea or nay on a single bill, some of which they may like and some they may dislike.

• They often contain “surprises” for lawmakers.


Why is Budgeting so Hard I?

• Priorities may differ among those involved in the process.

• Priorities will differ by party so they become partisan.

• Priorities may also reflect institutional conflict between the President and Congress


• the President’s budget

• the Congressional budget

• existing law that requires mandatory spending

• thirteen appropriations bills

Budgeting combines multiple processes.

Why is Budgeting so Hard II?


• because of the politics of deficits.

• because of the important matter of fiscal policy.

It is so hard:

Why is Budgeting so Hard III?


An Activity for Teaching About the

Budget

Please reference the handout.


Teaching About the Federal Budget

The current budget is such an aberration (most

people hope the current economic situation will

not repeat itself) that it is difficult to know

what “budget” to teach: the pre-meltdown

budget, FY09 (which is completed) or FY10

(which is in process), or the President’s FY11

budget which was released in February 1.


Teaching About the Federal Budget

The currency of the President’s budget may make it

the best teaching tool and instructors should be

able to find good summary information about it.

However, as this presentation is being prepared

that budget has not yet been released, so we will

discuss key elements of the President’s FY10

budget. This means that what we find at the end of

the year may look different from the figures we are

using.


The President’s FY10 Budget – Key Elements

Spending $3.550 Trillion

Revenue $2.381 Trillion

Deficit $1.169 Trillion


Revenue Sources

Individual Income Tax $1.1 T

Social Security and Payroll Taxes $ .9 T

Corporate Income Tax $ .2 T

Excise Tax $ .08 T

Customs Duties $ .02 T

Estate Tax $ .02 T


Mandatory Spending

This spending is required by existing law or contractual obligations.

$2.184 Trillion (notice this is almost as large as total revenues)

Major Categories:

Social Security $695 billion

Medicare $453 billion

Medicaid $290 billion

Interest on Debt $164 billion


Discretionary Spending

$1.368 Trillion Defense accounts for about half - $664 billion

Dept. of Health and Human Services $79 billion

Transportation $73 billion

Veteran’s Administration $53 billion

State Dept. and International Programs $52 billion

All Other Departments Less than$50 billion

Other major categories:


The Collapse of 2008 - Causes

There is no consensus (and we are not economists) but some common

beliefs are:• Deregulation over the past couple of decades was

based on beliefs that markets can correct themselves – the recent collapse suggests that if they can it is only after severe consequences.

• There was a housing bubble prices increased rapidly before retreating to more reasonable levels.

• There was too much debt.


The Collapse of 2008 - Causes

There is no consensus (and we are not economists) but some common

beliefs are:• There was too much debt backed by housing of declining value.

• There was a legacy of subprime lending.

• There was inflation in the commodity markets.

• There was mismanagement at many financial institutions.

• The crisis accelerated as major financial institutions lost massive amounts of money, some became insolvent and credit became very hard to get.


A Perfect Storm

The 2008 Financial Collapse

Credit Crunc

h

Job Loss

Housing

Collapse

Commodity PricesGlobal

Economy

A Very Scary Outlook and Fear of Another Great

Depression


The Collapse of 2008 Monetary Policy

Responses

• The Fed lowered the discount rate. In July 2007 it was 5.25%, by the end of 2008 it was essentially 0.0%.

• The Fed bought debt from financial institutions providing them money instead of debt that had uncertain value.

• The goal was to make credit available again, but increases in lending from the banks an financial institutions were very slow to come.


• There has been something of a rebirth in Keynesian economics and the use of fiscal policy.

• The national deficit has skyrocketed.

• Targeted spending did things such as bail out or federalize financial institutions and automakers.

• The federal government bought bad debt.

• The federal government extended unemployment benefits.

The Collapse of 2008 Fiscal Policy

Responses


• Job creation programs have been initiated.

• Certain tax rebates have been enacted.

• There have been financial transfers to states.

The Collapse of 2008 Fiscal Policy

Responses


How Was the Collapse Limited?

• The collapse was limited by the belief that governments should intervene.

• There were policy options both monetary and fiscal.

• Global institutions were involved and cooperated.


How Successful Were the Interventions?

• The situation did not turn into another “Great Depression.”

• But, the situation is still not healthy.

• It does seem clear that the aggressive use of monetary and fiscal policies limited the impact of the collapse.


Question and Answer

Please raise your hand and then type

your question in the Chat box.


Learning Objectives

Participants are now able to:

• explain to students how both monetary and fiscal policy are created.

• demonstrate the role U.S. Budget plays in fiscal policy.

• analyze the difficulties in creating the federal budget and controlling federal deficits.

• develop strategies for using events surrounding the economic recession of 2008 to teach about monetary and fiscal policy.


Thanks to Our Presenter

Gary Copeland


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AP ® Government and Politics – United States: Monetary and Fiscal Policy and the 2009 Economic...

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