An economic recession refers to a massive decline in economic activities concerning industrial production, employment opportunities, the country’s GDP, and real income. A significant reduction in aggregate demand brings about a recession for at least two quarters within a particular financial year. In many incidences, an economic recession occurs when the federal government imposes high-interest rates on credit facilities, resulting in a rise in the cost of money, thus lowering the demand for consumer borrowing (Verick & Islam, 2010). Therefore, when consumers shy away from borrowing financial resources, their purchasing power decreases, causing them to cut their expenditure on goods and services. Moreover, businesses find it hard to finance their business operations because of the high-interest rates. The only viable option is to lay off some workers to reduce operational expenses (Verick & Islam, 2010). This paper will discuss the fiscal and monetary policies adopted by the American economy during the great recession and its impact on the economy.
The fiscal policies are those that Congress implemented to stimulate the economy to recover from the great recession. The fiscal policies by the federal U.S. government were two-fold, with the formulation and implementation of the ESA of 2008 and the ARRA that followed the following year. The U.S. Congress passed the economic stimulus act after observing the slow response in economic growth during the 2007/08 financial year. This act provided tax relief to Americans that amounted to about $1,000 per individual, with about $300 for every child (Eberly et al., 2019). Congress allocated $100 billion in the tax relief program and $50 billion in business investment incentives. Businesses were also cushioned from the challenging economic times through payments that catered for the depreciating assets of the products they sold to end-users.
Even though the discretionary fiscal stimulus package initiated by the directive of the Congress led to improved outcomes as far as the recession is concerned, the automatically occurring stimulus had a quicker response to the deteriorating economic conditions. For instance, U.S. citizens were compelled to participate in safety net programs due to declining economic downturns. Engaging in these safety net programs was realized to reduce the taxes that households were meant to meet (Verick & Islam, 2010). Some of the automatic stabilizers in the U.S. that were noticed to offset the severe impacts of the recession included unemployment insurance benefits, Medicaid benefits, and the Supplemental Nutrition Assistance Program (SNAP). Various sources of revenue have been realized to contribute positively to automatic stabilization, including but not limited to taxes on corporate profits, social security, individual income taxes, and Medicare payroll taxes (Verick & Islam, 2010). Therefore, these taxes are raised during expansions, while during downturns, they are lowered to provide relief to citizens. These automatic stabilizers play a critical role in moderating booms and bursts of the economic cycle through increasing aggregate demand to suppress the adverse effects of the economic downturn, necessitating quick economic recovery.
The intensification of the recession in 2009 led to the implementation of the $787 billion stimulus package by Barack Obama’s administration. This stimulus package came into being under the American Recovery and Reinvestment Act. This stimulus package contributed significantly to ending the recession earlier than was expected. The government allocated $285 billion in tax cuts, while $502 billion was set aside for new projects relating to education, healthcare, and infrastructural developments (Tseng, 2015). Later in February the same year, President Obama allocated 75 billion shillings towards preventing the foreclosures of many U.S. citizens. This initiative helped about 10 million homeowners pay for the taxes of their mortgage buildings. At the same time, this temporary measure succeeded in sustaining homeowners in their residential buildings until the economy got on its knees while the banks were not convinced to adjust their policies.
Under the monetary framework, the federal government of the U.S. implemented the traditional measure of reducing interest rates. Within a timeframe of fifteen months, from September 2007 to December 2008, the federal U.S. government had reduced the federal funds rate from 5.35 percent to a range of between 0 and 0.45 percent (Tseng, 2015). However, much of the reduction occurred during the intensification of the recession in 2008 between January and March and in September and December (Tseng, 2015). Therefore, implementing this monetary stimulus policy increased inflation expectations while reducing interest rates. This led to the federal government implementing the explicit calendar guidance of maintaining deficient levels for federal funds rates to at least mid-2013.
The utilization of demand-side policies during the great recession was significant in restoring economic growth and reducing unemployment levels. For instance, the economic stimulus package provided the American citizens with a tax relief approximated to about 1,000 dollars per head with about $300 for every child. This tax relief encouraged the American citizens to purchase more goods and services required for their daily needs. Moreover, the safety net program touched on vital needs that every American must access, such as education, healthcare services, and accessibility to food. This restored America’s economic growth as a significant fraction of individuals acquired jobs working as healthcare practitioners, teachers, and serving food products to millions of Americans.
Tseng, K. C. (2015). The aftermath of financial crisis and the great recession and what to do about them. Investment management and financial innovations, (12, № 1), 9-18. Retrieved on 26th March 2022, from http://www.irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/cgiirbis_64.exe?C21COM=2&I21DBN=UJRN&P21DBN=UJRN&IMAGE_FILE_DOWNLOAD=1&Image_file_name=PDF/imfi_2015_12_1_3.pdf
Verick, S., & Islam, I. (2010). The great recession of 2008-2009: causes, consequences and policy responses. Consequences and Policy Responses. Retrieved on 26th March 2022, from https://www.econstor.eu/bitstream/10419/36905/1/625861256.pdf?fbclid=IwAR23tpo383Jdf7RHqIdcRFikUskiQMd8KbQobf5bv3VYi9CcqKHSjMs_rCc