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An economic recession is a period of widespread economic contraction characterized by a decrease in the stock market, a rise in unemployment, and a decline in the housing market. In general, the symptoms of a contraction are less serious than the consequences of depression. And the primary culprits are normally the federal leadership through the current government.
Fiscal policies are the actions of the government in terms of expenditure and taxes that have an effect on the economy. As a result, the government may exert leverage over macroeconomic efficiency levels by raising or lowering tax rates and public spending. Such a step would aid in the reduction of inflation, the expansion of jobs, and the preservation of health value for money. The idea of having fiscal policies is to find a balance between changing tax rates and public spending. One cannot increase spending or lower taxes in a stagnant economy as this might cause the inflation to rise. Therefore, before fiscal policies are created their effects need to be determined through careful considerations of the happenings in the economy.
There are different types of fiscal policies with the most widely used being the expansionary fiscal policy which stimulates economic growth. It does this either through the government spending more, cut taxes or does both. The reason behind this form of strategy is to put more money into the consumer’s hand to influence them spending more. The jump is essential in keeping businesses afloat and adding jobs as well.
Monetary policies, on the other hand, are how central banks manage liquidity to create economic growth. Some of the most common forms of cash or money supply include credit under which it includes loans, bonds, and mortgages. The primary aim of monetary policies is to manage inflation while the second is to reduce unemployment. However, it only comes after the first objective has been met (Tcherneva, 2011).
From December 2007 until June 2009 the United States experienced its most significant economic recession leading to what has been termed as The Great Recession. The effects of the recession were devastating, and in response, the United States government implemented fiscal and monetary policies to ease the economic hardships experienced. The Policy response from both the Bush and Obama Administration included government expenditures on top of the common general outlined system expected in a recession. The spending was used for the purchase of a large number of nonperforming financial assets from the balance sheets of struggling banks. All these efforts contributed to approximately 10% of the GDP but they remained inadequate in size and direction as their net effect on GDP growth or employment was insignificant (Alesina, 2012).
While the federal government was increasing its spending other key sectors such as states, households, and firms continued to slash theirs. This move offset much of the effects expected. Additionally, the spending injected by the government did not boost output, as much of the fiscal stimulus program generated demand for non-reproducible financial assets. In other words, the government spending was on non-employment inducing demand. Additionally, the tax cut payments received by firms and households were used to deleverage. In the cases that the government demand increased output and production, it failed short in delivering employment creation. Restructuring taking place in the recession at the time resulted in such inconsistencies as the production process relied on a leaner labor force and low labor cost respectively.
The implementation of the ARRA was projected to reduce the unemployment rate to 8% but in reality, it peaked to 10% after it was passed and then for the next one and a half years it hovered around 9.6% with no decline in sight.
However, in the long run, the effects could be seen yet the demand side policies implemented in 2008 could not entirely eradicate the harmful effects of the large economic decline experienced. Economic stimulus through fiscal plans is always a leaky bucket with most of the spending lost through regulatory and administrative costs. However, since the end of the recession in 2009 the unemployment rate held at 9.5%, it has continued to decrease to 4.1% in 2017 moderately. Real Estate has also been boosted by the policies with over $8,000 billion with saving rates falling by almost 2.9%from 2009 to 2012 which reflects to promoting consumer spending as well as contributing to economic growth with the nation working towards a more stable economy.
There are different thoughts of thinking as to why the demand side policies were not as effective as expected when the government introduced them. Arguments have been structured to suggest maybe the government’s decision to target economic growth and view employment opportunities as a byproduct is deemed a backward application of the fiscal policies. The upside down nature of the fiscal policies leads to natural unemployment rate due to the continuous failure to achieve anything close to the actual full employment rate expected (Keynes, 2016).
Alesina, A. (2012). Fiscal Policy after the Great Recession. Atlantic Economic Journal, 40(4), 429-435. http://dx.doi.org/10.1007/s11293-012-9337-z
Keynes, J. (2016). The general theory of employment, interest, and money. New Delhi: Atlantic Publishers.
Tcherneva, P. (2011). Fiscal Policy Effectiveness: Lessons from the Great Recession. Hudson, NY: Levy Economics Institute of Bard College. Retrieved from http://www.levyinstitute.org/pubs/wp_649.pdf
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