AP® Government and Politics – United States:
Monetary and Fiscal Policy and the 2009
Economic Recession
with Gary Copeland
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Today’s Presenter
Gary Copeland
Professor of Political Science
University of Oklahoma
Chief Reader for AP®
Government and Politics
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Welcome
Who is with us today?
Please answer the poll questions
on the screen.
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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.
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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.
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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.
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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
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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
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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)
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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.
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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."
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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.
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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).
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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.
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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.
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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.
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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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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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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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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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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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
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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
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Why is Budgeting so Hard III?
It is so hard:
• because of the politics of deficits.
• because of the important matter of fiscal policy.
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An Activity for Teaching
About the Budget
Please reference the handout.
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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.
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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.
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The President’s FY10 Budget –
Key Elements
Spending
$3.550 Trillion
Revenue
$2.381 Trillion
Deficit
$1.169 Trillion
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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
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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
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Discretionary Spending
$1.368 Trillion
Defense accounts for about half - $664 billion
Other major categories:
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
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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.
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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.
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A Perfect Storm
A Very Scary Outlook and Fear
of Another Great Depression
The 2008 Financial
Collapse
Credit
Crunch
Housing
Collapse
Global
Economy
Job
Loss
Commodity
Prices
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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.
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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.
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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.
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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.
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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.
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Question and Answer
Please raise your hand and then type your
question in the Chat box.
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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.
www.collegeboard.com
Thanks to Our Presenter
Gary Copeland
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