Monetary and Fiscal Policy: Crash Course Government and Politics #48

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. [Theme Music] 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 was a much more limited central bank. 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. I don’t know if they have 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 it pumps more money into the economy. 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 we have a hard time with fiscal policy. 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 people earning above $450,000 a year. 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. Overall the percentage of revenue that the federal
government receives from taxes has held pretty steady at between 43% and 50%. If you’re
interested in the numbers, for 2013 the government received almost $2.8 trillion in tax revenues.
And it spent $3.5 trillion, which math tells us means a deficit of around 700 billion dollars. Thanks, Thought Bubble. When people say that
they need to cut spending and balance the budget, this is what they are talking about,
but it’s not quite as simple as just spending less, because there are some places where
the government can’t cut spending even if they want to. There are certain items in the federal budget
that must be spent because they are written into law by Congress. These are called uncontrollables,
or mandatory spending. One uncontrollable that relates to monetary
policy is interest payments on federal debt. The government can’t not pay its interest,
otherwise no one would lend us money. That’s just how lending works, or it’s
supposed to work. Farm price supports – subsidies – are
also counted as uncontrollables, and they are important, but not nearly as important
as the two big-ticket mandatory spending items. These are social security and Medicare, and
they are paid for with dedicated federal taxes. They provide income and health insurance for
elderly people and it’s unlikely that the amounts the government spends on them is going
to decline anytime soon for three reasons. First, is that the population is aging, meaning
that the percentage of older Americans is rising in proportion to younger Americans.
This means that more people will be receiving Social Security payments, which leads us to the second
reason they are unlikely to go down: people like them. The third reason is more political: older
people tend to vote more regularly, so a politician who wants to keep their job is unlikely to
vote for cuts in Social Security or Medicare. So, here’s the thing about the Federal Reserve
and economics: The American economy is really huge, and really complicated, and has some
issues that need addressing. Whether you care a lot about budget deficits
or don’t think they’re a big deal will depend a lot on your feelings about economics in general,
but there are a couple of things to keep in mind. First, there’s only a limited range of programs
on which the government can choose to spend or not spend. These are called discretionary
spending and when people call for cuts in government spending, this is what they mean. By far the largest chunk of government spending
goes into defense, over $600 billion in 2013, but the next largest item is healthcare for the poor, Medicaid, at $498 Billion. Nothing else even comes close. Spending on the Department of Education,
for example, was $41 billion in 2013. The second thing to bear in mind is that in
addition to cutting spending, the government could balance its budget by doing what everyone
loves – raising taxes. It’s done this on occasion, but the political consequences can be pretty
tough. Just ask George H.W. Bush. Finally, the combination of Americans’ aversion
to raising taxes and the government’s limited ability to cut spending means that monetary policy becomes
its major lever in broad-based macroeconomic policy. That’s why we paid so much attention to
the Federal Reserve system at the beginning of this episode, and why you probably should
too. Thanks for watching. See you next time. Crash Course Government and Politics is produced
in association with PBS Digital Studios. Support for Crash Course: U.S. Government comes from
Voqal. Voqal supports nonprofits that use technology and media to advance social equity.
Learn more about their mission and initiatives at Crash Course was made with the
help of all these broad based macroeconomic policy makers. Thanks for watching.

100 comments on “Monetary and Fiscal Policy: Crash Course Government and Politics #48”

  1. Jamiethecommie says:

    Bankers landlords bosses oh my

  2. Ricois says:

    Crooks and thieves.

  3. Syed Fazil says:

    Crash Course should do crash course government and politics UK since there are a lot more countries using the UK system compared to US system . Ex : Singapore , Malaysia and India .

  4. MaxFrisch84 says:

    Unconditional Income FTW! Life has to be free!

  5. Thomas Kinyon says:

    Hey, an episode over state and local goverments would be nice after all they're trying to cut out civics classes in schools.
    And it is part of U.S. government and politics

  6. Millz Pillz says:

    This video is great, however – from an educational standpoint, I think some of these concepts should have been fleshed out a little more or 'dumb-ed down'. Economics in general is more abstract and takes some time to wrap one's head around. Otherwise, great crash course 🙂

  7. TheJrpacman says:

    RIP Justice Scalia

  8. Jackboy019 says:

    Here's my logic against the efficiency of supply side economics, it seems hard for anyone to justify the amount of money necessary to be spent by the rich in order to have the same amount of money feed back into the economy. The ratio of money the upper class is able to generate compared to how much they spend is heavily favoring the idea that they earn more money then they can ever hope to spend, therefore this causes uneven wealth distribution which weakens the flow of money in the economy and slows it down. It seems the only way to counter this is through heavy taxation of the upper class then using the tax money to allow the lower classes to generate more wealth for themselves which would strengthen the flow of money creating a strong economy through balanced wealth distribution. There is has never been evidence suggesting trickle down economics strengthens the flow of money necessary for a strong economy.

  9. Jesyca says:

    Thanks… i had fun listening to the cc, plus I learnt a couple of things… I guess that's how education should be! (…apart from punching that eagle?!! I think you got quite tired of it at the very end… … …Need a little bit of motivation….? Get that eagle!!!!)….

  10. Sarah Lindner says:


  11. Freek314 says:

    If you want to learn economics, look up the Mises Institute.

  12. Petar Mihaylov says:

    After more than 6 years of 0 percent interest rates and 3 rounds of QE, you think the inflation would really be at 2 percent? Come on, Craig. The reason it hasn't all been blown up by now is that the dollar is still the world reserve currency. It's unstable and not so secure, but it's still the best and everyone wants it as a form of backup. Just think of all the dollars stored in foreign banks around the world and then talk about inflation. And then think about the consequences when everyone decides that the dollar is not worth while anymore and that money starts flooding back into the US.

  13. Laharal Bob says:

    Just a thought here: since 2 new CC series are coming out (physics and philosophy) might we get a CC on international politics? As we had american history and 2 world history, I think international politics would enable people to broaden their views and put them into perspective. And instead of punching eagles Craig (if he is qualified for int. pol.) could punch many other types of birds 😉 )

  14. Dylan Collette says:

    is it me, or does he look like a younger Tom Mulcair?

  15. shy cake says:

    talk too fast

  16. Saraaa_Catherine says:

    Hey so these are super duper great and really interesting, as someone who is taking A Level Politics (I'm English btw) I was wondering if you could do UK Politics as well though. I know if you do do it my AS level will be long gone by that point but I still think it would be really interesting and beneficial because I want to go into Politics at Uni and Im sure there's other British people who would like to no more about UK politics who already watch this. These are really cool and super interesting though, will help even more next year when I do USA Politics 😀

  17. Lady Catfish says:

    Social Security spending far exceeds military spending. And those small government folks (especially Libertarians) call for lower defense spending too.

  18. Adam Borison says:

    Reaganomics is a joke, for those wondering.

  19. 476 Anno Domini says:

    Libertarians :Tell me another Joke.

  20. أفلاك الأفكار says:

    A possible reason why we don't see too much inflation in the US despite so much money slushing around is because a lot of it is slushing around overseas (since the US is the world's reserve currency) and thus the harmful effects of inflation are less pronounced on US home soil… at least for now

  21. Spencer Burns says:

    I don't like you you punch egads that's un-American get out my country

  22. Spencer Burns says:


  23. RonPaul Revered says:

    Where does the Federal Reserve get the capital to loan to governments? Oh! that's rights, they make it up out of thin air.

  24. Visda58 says:

    All that cash stacked up on pallets in that warehouse…. that would be a work environment fraught with temptation. I bet there's some serious background checks required for that particular forklift position.

  25. The deathless face of the unborn mind. says:

    If you want REAL analysis of monetary policy check out The Kieser Report with Max and Stacy on Russia Today. Or checkout Steve keen or Ross Ashcroft.

  26. Gregor Mattedi says:

    Is this the last video of the series ?

  27. Maximilian says:

    I know Craig was sarcastic at the beginning of the video, but as I am writing my Master Thesis on fiscal policy I was actually looking forward to this topic! Gret job Craig! <Pulls Partypopper>

  28. Arya Santoso says:

    demand side policies will always lead to inflation. stick to supply side policies

  29. RedLeader327 says:

    Ronald Reagan's toxic policies are why the US has been going to shit.

  30. NickSheridanVids says:

    It's appropriate that most money is made of paper, because so is the fucking economy.

    Or some other witty college level remark.

  31. drummerboy1119 says:

    I love you Craig

  32. Carolina G says:

    I love this guy

  33. Isabelle von Lockner says:

    I literally LMAO during every video, the host is so funny.

  34. TheFireflyGrave says:

    The Econ folks are making so many cameos you might have to start putting them in the credits as regular cast members.

  35. Jason Waite says:

    Crash Course, your REALLY pissing people off not telling the truth. The Fed is NEITHER Federal, nor a reserve!

  36. merdo merco says:

    u talk so fast damn

  37. 孙明亮 says:

    Hey I got a question, what's the point to speed up or slow down an economy.

  38. Josef Mari Lim Villanueva says:

    Oh yeah

  39. Guadalupe Estrada says:

    If the defense concentrated their efforts on education then they could maintain their large share of funding without feeling guilty about it. Defend impoverished children attain a better education by keeping them out of gangs, drugs, and abusive parents, for example, and hopefully, they shall see the same privileges of a second chance I have been grateful to be born with.

    They have the money and skill to do it, don't they? And both liberals and conservative thinkers can maintain their idea of justice, authority, fairness, and protection from harm.

  40. Abhay Singhal says:

    This video is way too short to really explain the macroeconomic effects of MP and FP, do check out their econs series

  41. Ben Hansen says:

    Noting could ever beat a moneyless sociaty. Why do people feel the need to use a monetary system to mediate social interaction? Even a debt based monetary system hinders our full societal potentiality. People seem to be stuck banging their head trying to make social development fit into archaic ideology. If we do not socially evolve we will not grow with the speed and flexibility that we are capable of, and I would argue that right now we can clearly see the stunted growth in our technological advancement due to our use of a monetary system. We need to evolve and develop into a moneyless sociaty. Of course this is contingent on living through biosphere destruction and mass extinction, so in reality we need to work to maintain a habitable planet and better our social relationships at the same time. We can do the right things but it will take courage.

  42. Ronalyn Caingcoy says:

    Wait. You`re so fast there talking. Anyway, I get a lot from you. Thanks.

  43. Walter Torres says:

    love the eagle

  44. Bell Dupont Pérignon says:

    Looooved the intro! Haha

  45. Luna Sunshine says:

    I wanna get fiscal.

  46. Wimal Senarathচকখঘঙ says:


  47. Wimal Senarathচকখঘঙ says:


  48. Alex da Vinci says:

    Craig, were you bully in school a lot? Just asking.

  49. Meeco Adnan says:


  50. Mrqueest says:

    so why do we need both monetary and fiscal policy in the economy?

  51. Prameet Aglave says:

    you are damn funny

  52. Zachary Falberg says:

    Social security will fall, not rise because people like them…

  53. Abraham Chinye says:

    this is economics I swear

  54. Travis Taylor says:

    there he goes again encouraging communism and destroying the freedom of americans. Eagle abuse is real and a big problem. Communist #StandwithEagle

  55. A Teacher's Journey says:

    Even with this help, i still am going to fail my Government and ECON. class. I hate government! So complicated.

  56. Majoofi says:

    Talk about MMT

  57. interiortruth says:

    Surprisingly, this is a lot more better than the crash course economics video which our teacher made us watch. Thanks!

  58. ? says:

    Not to sound mean but craig's starter jokes are extremely awkward…

  59. WeirdWorld says:

    What ever happen to just ratio earnings, like a wealthy man should earn what 20 men earn, but now a wealthy man earns what 200,000 men earn.

  60. Richman 4066 says:

    Anyone else think something bad is going to happen to the economy now that trump is president?

  61. Richman 4066 says:

    Video is buffering; Craig is now staring right into my soul

  62. ML V says:

    Where's John? Who is this guy?

  63. weallbfree says:

    So during a depression, does the money just disappear? How would you "decrease" the money supply without making all the banks give their currency back to the Fed?

  64. Marcell G says:

    does he actually have any drink in his mug?


    Hi CrashCourse. Exchange rate of hard currency in black market sometime causes inflation if the government is overspending and etc. My question is, How can black Market be demolished?

  66. Aku says:

    Death to the penny

  67. julia caroline says:

    How to cram for my ap test 101

  68. World Recipe of Life says:

    what about mandatory spending on government and bureaucratic salaries?? how much is that in relation to the other spending?

  69. Luxmi Tushamar says:

    why I don't get teachers likes you ,😢😢

  70. CodeKillerz says:

    I’m watching this after the government shutdown. How fitting

  71. Warcraft Devil says:

    Thanks I needed this for my test tom

  72. Miranda Bowen says:

    He makes learning about our government a fun thing

  73. Ankur Kale says:

    what will happen to the exchange rate
    if a nation pursue independent monetary and fiscal policies?

  74. saima arshad says:

    Dude you really need to slow down a bit. I have to either watch the video at a slower speed which is annoying and sounds all funny or I have to keep going back to hear what you said. Other than that the overall video is really good. Explains exactly what i needed to know.

  75. Mark Sze Chai Chan says:

    Just cut spending on defense

  76. TRED says:

    Uncle Scrooge Mcduck!!!!

  77. Vas Alexander says:

    You are not funny but silly stick on the things you know.

  78. SeanA118 says:

    Hi people who have to watch these videos for homework!

  79. bsktblmasta31 says:

    what year was that $8T debt clock from? Over $21T by 2018.

  80. bsktblmasta31 says:

    Mandatory spending is only mandatory until Congress updates the law, which desperately needs to happen.

  81. Justin Dean says:

    Low interest rates directly lead to inflation. It’s 1 to 1. Idk where he got that information from.

  82. Farhan Ahmad says:

    Ironically the video shows Donald at 6:00 😂😂😂

  83. Summondadrummin says:

    However you slice it the Banksters create the currency and define it as an interest bearing debt and allocate made up numbers only where they want. The currency is only made valuable by people working. Without people working it would be worth nothing so its value is entirely derived from Labor but its control and creation is entirely derived from Finance. This can go on because people are gullible or able to be bought off and have been so for a long time this is the way the Fed likes it. Watch the Talks of Richard Werner for details on how Banks create the money supply.

  84. Summondadrummin says:

    Watch: The Money Masters, Money As Debt, The Money Fix. Look into Public Banking, Cooperative Banking, Monetary Reform. Look up the talks of Richard Werner and Bernard Litaer

  85. Asher Hernandez says:

    You're a bad teacher.

  86. Daniel Sauceda says:

    im goonna suck him

  87. Thinking Ahead says:

    What an idiot. This is a very stupid way to learn such important things..

  88. Carmen Mencar says:

    Sad I didn't know about this series for so long.

  89. Zhana Sirbiladze says:

    Why is it mandatory to act over excited and scream/talk super fast at Crashcourse videos?

  90. Lily Iotua says:

    It really helps as I gain more points on fiscal policy and monetary policy to the economy. Thanks again

  91. Vinduli Minara says:

    I wanna get fiscal 😂😂😂😂😅😅

  92. Elijah Ford says:

    We’ve got to have, money.

  93. Elijah Ford says:

    Put taxes on the rich.

  94. EveryBodySucks100 says:

    Audit the FED

  95. KALI'S VLOGSS says:


  96. Angelyn Pham says:

    ap gov exam tmrw ;-;

  97. Elianna says:

    Shes tommorow!!

  98. Bitter Cider says:

    craig please I want to go to sleep its 2:30 am and I have to take the test in 6 hours please craig I cant do the confetti poppers right now pleas e I ne ed sl eep cr aig plea se

  99. Marissa Olivia says:

    when u live in a different country…

  100. Hunni Sem says:

    The Beginning hyped me up too much XD

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