Name: Monetary and Fiscal Policy: Crash Course Government and Politics #48
Uploaded: 2016-09-18T04:21:20.000Z
Duration: 9 min 19 s
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Hello, I’m Craig and this is Crash Course Government and Politics and today we’re finally

gonna talk about a topic I know that you've all been waiting for: Monetary and Fiscal policy. Hurray!

You haven’t been waiting for monetary and fiscal policy? Are you sure? I’ve been talking

it up for weeks, you know? Well, let me see if I can’t convince you to be as excited

as I am. Monetary Policy! Wooo! Fiscal Policy! Yeah! I want to get fiscal, fiscal.

Come on and get fiscal… okay let’s start the show.

Let’s start with monetary policy because it’s not at all controversial.

Well, it kind of is controversial, but it’s less contentious than fiscal policy.

Monetary policy is basically the way the government regulates the amount of money in circulation

in the nation’s economy. Controlling the money supply is the primary task of the Federal Reserve

System and since it’s a little bit complicated, I’m going to talk about the other things that the Fed does first.

The Federal Reserve System was created in 1913 to serve as America’s central bank.

Before then, there were state and local banks as well as a Bank of the United States, which

The Fed is made up of 12 regional banks, and two boards. The Federal Reserve Board of Governors, who are appointed by

the President, and the Federal Open Market Committee,  which is partially appointed by the president.

The Fed has two primary tasks: to control inflation and to encourage full employment,

and it has four basic functions, but one of them is way more important than the others.

The Fed is responsible, ultimately for clearing checks, and for supplying actual currency,

most of which is kept in highly secure facilities staffed by robots. With laser eyes.

The Fed also sets up rules for banks, although these can also be set by Congress. But the

most important thing that the Fed does is loan money to other banks and set interest rates.

That’s why when you hear about the Federal Reserve, nine times out of ten it’s about

interest rates, because that’s the main way the Fed controls the money supply.

The Fed loans money to banks, sweet, sweet money, which they in turn loan out to businesses

and individuals and, like all loans, the Fed charges interest. The Fed sets the rate on

the interest, called the discount rate, and this determines, mostly, how much money banks will borrow.

The lower the rate, the more banks will borrow and the more money goes into circulation.

Other banks peg the interest rates they charge to the Fed’s rate, charging slightly more,

so in this way the Fed determines, or sets, interest rates in the economy as a whole.

The Fed also creates regulations that control how much money circulates in the economy.

One of these is the bank reserve requirement, or the amount of money in cash that a bank has to have on hand.

Now the amount of money that a bank holds in reserve is only a fraction of the total

amount of money held in deposit at the bank – that’s why it’s called fractional

reserve banking – but the reserve requirement is there so that you don’t get catastrophic

bank runs like we saw during the Great Depression when so many frightened depositors took their

money out of banks that the banks failed.

Raising the reserve requirement reduces the amount of money in circulation and lowering

The Federal Reserve also sets the interest rate banks charge to lend money to each other,

which again controls the amount of money that circulates.

If banks are charging each other a lot of money to borrow, they won’t borrow as much,

and they won’t lend as much to firms and individuals and there will be less money in the economy as a whole.

There’s at least one more important way that the Fed influences the money supply in

the U.S. and that’s through Open Market Operations.

This is a fancy way to say that the Fed buys and sells government debt in the form of treasury

bills, or government bonds. When the Fed sells bonds, it takes money out of the economy,

and when it buys them more money goes into the economy.

This is the idea behind what was known as Quantitative Easing, which is really complicated.

To be honest, I’m not crazy about wading into economics here, and thankfully there’s

a whole other series to do that, but I have to mention inflation at this point.

Inflation is a general rise in prices that can be caused by a number of things, but one

of them is the amount of money that circulates. If there’s more money around, there’s

more that can be spent and this makes it possible for prices to go up.

But this isn’t an absolute rule, as of 2016 we’ve had years of basically zero interest

rates, which means it’s really cheap to borrow money, which means that there should

be a lot of money in circulation, yet inflation remains quite low.

Hey, it’s real cheap to borrow money. Can I borrow two bucks? No! [punches eagle] He never has any money.

Usually low interest rates tend to cause inflation and reduce unemployment, and high interest

rates are expected to cool down an overheating economy, but that hasn’t happened much in

the past few years. I’ll say again, I glad this isn’t an economic series.

It’s important to note here that the Federal reserve is an independent body, meaning that

its board of governors and chairperson are not elected or really subject to much regulation

from Congress. And they throw the best parties. That’s probably why.

This is intentional and probably a good idea. Ideally, you want people in charge of the

money supply to be able to look after broader interests than their own re-election, and

this is why the Fed is supposed to be insulated from politics and remain independent.

Ok, so that’s monetary policy, which is one lever that the federal government can

use to influence the economy. Increasingly it’s the only lever, because in America

What’s that, you might be asking? Fiscal policy refers to the government’s ability

to raise taxes and spend the money it raises. Since I know that by this episode you’ve

been paying a lot of attention to American politics, you know that in the past 20 or

30 years, at least, Americans have generally been reluctant to raise taxes, and somewhat

reluctant to have the government spend money. The difference between these two goals – spending

money and not raising taxes – largely explains why we have deficits.

Before we get into tax policy, which I know is what you’ve been waiting for, calm down,

I need to point out that the way the government can spend more money on programs than it takes

in taxes is by borrowing it, which the government does by, you guessed it, selling bonds.

Good thing we talked about Open Market Operations.

Let’s tax the Thought Cafe people with a lot of work, by talking about taxes and spending in the Thought Bubble.

First, ever since Ronald Reagan came to office there has been a hostility towards higher

taxes and government spending that is theoretically based in an idea called supply side economics.

I’m not going to discuss the details of the theory or even whether it’s right or

wrong or somewhere in between, but the basic thrust is that if you lower taxes on businesses

and individuals, the individuals will be able to spend more, the businesses will be able

to invest more, and the economy as a whole will grow. It’s a simple and politically

powerful idea and has set the terms of the debate for a generation.

In general, over the past 30 years the trend is for there to be lower federal taxes and

for them to be less progressive, meaning that wealthier people pay a lower percentage of

their income in Federal taxes. The wealthy still pay the largest share of federal taxes

overall, though, so it’s not completely accurate to say that they aren’t paying.

Since Reagan, and especially during the presidency of George W. Bush, income tax rates on the

highest earners have fallen, as have taxes on estates (although they did go up again)

and on capital gains and dividends. President Obama did raise tax rates, but primarily on

Corporate tax rates have also declined and Social Security taxes have gone up, which

is important because this is the federal tax that most of us are most likely to pay.