1. AP® Government and Politics – United States: Monetary and Fiscal Policy and the 2009 Economic Recession
with Gary Copeland

2. Today’s Presenter Gary Copeland Professor of Political Science
University of Oklahoma
Chief Reader for AP® Government and Politics

3. 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.

4. 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.

5. 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

6. 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
Added the Beard parenthetical

7. The history of the role of government in managing the economy.
Creation of Federal Reserve Board (1913)
President’s Budget (1921)
Turning point of the Great Depression
Congressional Budget and Impoundment Control Act (1974)

8. 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.

9. 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."

10. Monetary Policy Theory
The Cost of Money
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.

11. Monetary Policy Theory
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).

12. Monetary Policy Theory
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. 

13. 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.

14. How is Fed Independence Achieved?
There are long terms for its leadership.
Members are appointed by president and confirmed by Congress.
The Fed largely controls its own budget.
Reverse with #20

15. 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.
Reverse with 21

16. 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.

17. 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.

18. 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.

19. Fiscal Policy Challenges
Some argue that fiscal policy is ineffective because:
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.

20. Budgeting The Federal budget is:
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).

21. 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.

22. 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.

23. 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
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24. 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.
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25. 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.
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26. 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.
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27. 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

28. Why is Budgeting so Hard II?
Budgeting combines multiple processes.
the President’s budget
the Congressional budget
existing law that requires mandatory spending
thirteen appropriations bills

29. Why is Budgeting so Hard III?
It is so hard:
because of the politics of deficits.
because of the important matter of fiscal policy.

30. 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.

31. 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.

32. A Very Scary Outlook and Fear of Another Great Depression
A Perfect Storm
A Very Scary Outlook and Fear of Another Great Depression
Job Loss
Credit Crunch
The 2008 Financial Collapse
Commodity Prices
Housing Collapse
Should follow #41
Global Economy

33. 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 and financial institutions were very slow to come.

34. The Collapse of 2008  Fiscal Policy Responses
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.
Red ok

35. 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.
Red ok

36. 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.

37. 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.

38. Thanks to Our Presenter
Gary Copeland

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