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

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

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

3. Please close all applications other than Adobe Connect to ensure the best possible performance.

4. Set Your Connection Speed

5. Using the Personal Icons

6. Text Messaging

7. Welcome Who is with us today? Please answer the poll questions on the screen.

8. 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.

9. 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.

10. 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.

11. 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

12. 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

13. 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)

14. 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.

15. 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."

16. 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

17. Monetary Policy Theory When the real cost of money (and credit) istoolow: 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

18. Monetary Policy Theory 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

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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:

26. 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:

27. 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.

28. 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.

29. 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

30. 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.

31. 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.

32. 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.

33. 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

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

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

36. An Activity for Teaching About the Budget Please reference the handout.

37. 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 wasreleased in February 1.  

38. 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.

39. The President’s FY10 Budget – Key Elements

40. Revenue Sources

41. 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:

42. Discretionary Spending $1.368 Trillion Defense accounts for about half - $664 billion Other major categories:

43. 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.

44. 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.

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

46. 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.

47. 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.

48. 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.

49. 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.

50. 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.