Recession in economics

Economic Recession and Government Response

In economics, a recession is a time of economic downturn characterized by a rise in unemployment, a decline in the housing sector, and a reduction in the stock market. A contraction is less serious than a depression. When a recession happens, the federal leadership – be the Federal Reserve Chairman, the President, or the whole administration – is held accountable.

The United States Economy in 2008

The United States (US) suffered a major slump in its economy in 2008. However, the government used vigorous fiscal and monetary strategies not only to balance the economy, but also to counter the crisis.

Demand-side Policies

Demand-side Policies were implemented to manipulate or control these economic conditions which prevailed.

Fiscal Policies

Fiscal policy refers to economic influence, which results from the utilization of government revenue (Tax) and expenditure (Spending). When the government influences changes in the levels of taxation and spending, the aggregate demand and level of economic activity get affected (Friedman & Schwartz, 2008). Nonetheless, fiscal policy is used to enhance financial stability over the course time. For instance, due to the recession, the government came up with legislation that federal banks used in stabilizing the economy.

During this recession, the US Congress enacted the economic stimulus act in 2008 which had several benefits. The law ensured that businesses were given tax incentives, for example, the low-income earners were given tax rebates (Godley, 2012) hence companies continued investing in the country. Investments stimulated by this incentive played a significant role in stabilizing the economy. Unemployment rates which were at 6% were reduced (Claessens et al., 2009). Through tax rebates, there were an increased US taxpayers disposable income through the act. This led to growth in the economy.

Secondly, the Act of American Recovery and Reinvestment was implemented in 2009 by the Congress to create job opportunities and preserve the current ones. According to Godley (2012), the private spending of the economy was to be backed by Federal Reserve to achieve this and by using government spending to cover all the deficit. It helped in ensuring optimum money supply in the economy through changing hands of money. Consequently, business flourished and new employees were hired. Overall, growth in the economy was registered.

Monetary Policies

Monetary policies are a country’s regulations, which are used by the central bank to regulate the rates of interest and supply of money in an economy to achieve macro economy goals such as reduced unemployment rates and inflation. The use of federal fund rates was employed by the national bank in efforts of stabilizing the economy during the great recession. The rates that central bank gives banks to guide them in lending and borrowing money is known as federal funds rates. The federal fund’s strategy brought expansion of the constricted economy. There were various advantages accrued to these rates, for instance, banks and business people acquired funds that kept them afloat during the recession. According to Friedman & Schwartz (2008), this led to an increase in the economy’s money supply since it encouraged people to take credit. With this policy, the issue of skyrocketing individuals losing their jobs due to cash flow issues that employers experienced was addressed. Companies were therefore on operation hence securing jobs that would have been lost if nothing was done to help businesses that were cash-strained.

Secondly, the federal bank used quantitative easing between 2009 and 2014. This easing assisted in stimulating the economy since the low federal rate was in operation. The bank took part in the purchases of various products such as massive treasury bonds and mortgage-backed securities. It was necessary to make this move to reduce the country’s long-term interest rates and expand the balance sheet of the bank. During the recession, the real estate industry was saved from collapse by this policy hence jobs opportunities in this field were secured. Money which helped improve the disposable income of citizens and business all over the country was as well injected into the economy through this method.

Finally, the federal bank increased deposit limits insurance and debts of banks guaranty. The Troubled Asset Relief Program was passed and through it, injecting money into the National banks by the federal bank was possible. The said program was passed in 2008. Banks were protected from depression. Its effect and credit could also be advanced to other businesses at low-interest rates. The existing job opportunities were preserved as well through this policy hence unemployment rates were reduced.

Conclusion

Countries that were affected by depression handled it in different or rather unique ways. The US took Fiscal policy measures to ensure that citizens had adequate money to spend, for instance, an increase of citizens’ disposable income through tax rebates. The United States as well used monetary policies to ensure that money supply in the economy is adequate for supporting domestic trade, which significantly added value to the country’s GDP. Business was maintained through the policies by reducing the rate of citizens’ unemployment. Fiscal and monetary policies, therefore, played a critical role in stabilizing the United States economy after the great depression.

References

Claessens, S., Kose, M. A., & Terrones, M. E. (2009). What happens during recessions, crunches, and busts? Economic Policy, 24(60), 653-700.

Friedman, M., & Schwartz, A. J. (2008). A monetary history of the United States, 1867-1960. Princeton University Press.

Godley, W. (2012). Seven unsustainable processes: medium-term prospects and policies for the United States and the World. In The Stock-Flow Consistent Approach (pp. 216-254). Palgrave Macmillan UK.