Economic recession has devastating impacts on any economy. Recession depresses economic activity and is responsible for massive loss of employment. Families bear the brunt of recession as breadwinners are rendered jobless. It is the responsibility of leaders to shield families and entire communities from the devastation that could result from economic recession. Fiscal and monetary policies are some of the tools that leaders can use to cushion individuals against recession (Labonte, 2016). Essentially, these tools allow leaders to modify such things as interest rates with the goal of spurring economic activity. Automatic stabilizers such as unemployment insurance are the other tools that can be used to minimize the impact of recession. Opinion is divided on whether these tools are effective. The use of these tools to spur economic growth during recession is the subject of this briefing paper. In the paper, the position that these tools are effective and should therefore continue to be used is assumed.
Fiscal and Monetary Policies
As mentioned above, there is no consensus on whether fiscal and monetary policies perform the role of spurring economic growth for which they are designed. The response by the authorities in the US to the 2008 financial crisis that affected many economies across the globe offers answers to the question of whether the monetary and fiscal policies are effective. One of the policies that were adopted is quantitative easing. Basically, this policy involves increased government spending. A reduction in the rate of tax levied on banks by the Federal Reserve is another measure taken by US authorities (Labonte, 2016). The government wished to encourage firms to hire more workers thus shielding families from the effects of unemployment resulting from the economic recession. The United States is yet to fully recover from the recession. However, the impacts of the fiscal and monetary policies that were implemented in response to the recession can be seen. For example, the Federal Reserve increased the federal fund rate (Labonte, 2016). This move is interpreted to mean that the economy has recovered and that the monetary policy is no longer necessary. The Federal Reserve also ended the policy of quantitative easing. The Federal Reserve has issued an optimistic outlook for the economy even suggesting that the unemployment rate would fall (Labonte, 2016). The positive outlook and the moves by the Federal Reserve are all indications that the fiscal and monetary policies undertaken were effective.
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The withdrawal of the monetary and fiscal policies by the Federal Reserve as described above suggests that the policies are effective. However, statistics would be more convincing in the case for the effectiveness of the policies. One of the policies that were implemented following the crisis was a bailout of struggling companies. Car makers are among the firms that benefited from the bailout. A study that investigated the impacts of the bailout revealed that the bailout helped to save 1.5 million jobs (‘Auto bailout saved...’, 2013). Without the bailout millions of Americans would have been left without jobs. For example, it is estimated that GM, a car maker that benefited from the bailout, would have been forced to send home 1.2 million of its employees in 2009.
Not everyone is convinced that the fiscal and monetary policies are effective. There are those who believe that the policies created more problems than it solved. One of the arguments that is used to oppose fiscal and monetary policies is the effect that they have on the budget deficit. Estimates released by the Congressional Budget Office place the budget deficit at $5.6 trillion (‘The 2015 long-term…’, 2015). This figure represents a dramatic rise in the deficit. The amount of federal debt that the American public holds also rose. It is true that the policies have had these impacts. However, it must be noted that these impacts are the necessary and inevitable effects of monetary and fiscal policies. The increased budget deficit and debt are simply the necessary costs of recovery that the American public must incur.
Automatic Stabilizers
Automatic stabilizers are yet other tools used to protect individuals from the impacts of recession. Unemployment insurance is one of the automatic stabilizers used in response to the 2008 recession. The US Department of Labor holds that thanks to the insurance, 17 million Americans received help (Perez, n.d). The unemployment insurance also saw 4.5 million individuals who were left unemployed following the recession also received support. The benefits of the unemployment insurance were not enjoyed by only American adults. 3.2 million children are estimated to have been spared of the negative impacts of the recession (Perez, 2015). This is attributed to the unemployment insurance provided by the government. The unemployment insurance is also credited with promoting economic activity. It is believed that if extended, the unemployment insurance would have added as much as $67 billion to the nation’s economic activity. The Council of Economic Advisers is among the groups that support the unemployment insurance. According to the group, the US economy would be denied 500,000 jobs if the nation failed to extend the unemployment insurance (Perez, n.d)
Jason Furman, the chair of the Council of Economic advisers added his voice to the debate on the effectiveness of such automatic stabilizers as unemployment insurance. In an article that he penned, Furman argued that unemployment insurance is healthy for the American labor force (Furman, 2016). When individuals lose their jobs, there is some chance that they will become detached from the labor market. Furman holds that unemployment insurance keeps jobless individuals tied to the labor market (Furman, 2016). When economic conditions improve and jobs become available, the individuals are simply reabsorbed back into the market. This allows the individuals to remain productive. Furman’s thoughts clearly indicate that the automatic stabilizers are effective and should not be dropped. The arguments raised above in support of the continued use of the monetary and the fiscal policies and automatic stabilizers are consistent. All the arguments point to the effectiveness of these tools.
As is the case with fiscal and monetary policies, there are individuals who do not share the opinion that automatic stabilizers are effective. Chris Edwards and George Leef highlight some of the negative impacts of unemployment insurance. They argue that unemployment insurance discourages jobless individuals from seeking employment (Edwards and Leef, 2011). They also contend that unemployment insurance takes away the incentive for employers to hire. The insurance is financed by the public and the private sector. Since employers contribute to the insurance, they are left with less money to hire new workers (Edwards and Leef, 2011). These effects have the impact of depressing economic activity. It takes longer for the nation to recover from recession. While the arguments that they raise are valid, they fail to capture the full effect of unemployment insurance. Overall, unemployment insurance is effective as most of its impacts are positive.
Conclusion
The United States continues to grapple with the impacts of the 2008 economic recession. The nation is yet to return to the level of economic growth that it witnessed in the years before the recession. The American government implemented a range of policies aimed at boosting the economy. The policies ranged from quantitative easing to strengthening unemployment insurance. The impacts of these policies have been mixed. However, these policies have had an overall positive impact. The nation needs to exercise caution to ensure that a recession does not occur again.
References
Auto bailout saved 1.5 million U.S jobs-study. (2013). Retrieved 26th September 2016 from
http://www.reuters.com/article/autos-bailout-study-idUSL1N0JO0XU20131209
Edwards, C., and Leef, G. (2011). Failures of the Unemployment Insurance System. Retrieved
26th September 2016 from http://www.downsizinggovernment.org/labor/failures-of-unemployment-insurance
Furman, J. (2016). The Economic Case for Strengthening Unemployment Insurance. Retrieved
26th September 2016 from https://www.whitehouse.gov/sites/default/files/page/files/20160711_furman_uireform_cea.pdf
Labonte, M. (2016). Monetary Policy and the Federal Reserve: Current Policy and Conditions.
Retrieved 26th September 2016 from https://www.fas.org/sgp/crs/misc/RL30354.pdf
Perez, T. E. (n.d). The Economic Impact of Unemployment Insurance. Retrieved 26th September
2016 from https://www.dol.gov/dol/maps/euc/euc.htm
The 2015 Long-term Budget Outlook. (2015). Retrieved 26th September 2016 from
https://www.cbo.gov/publication/50250
