Globally, individuals tend to confuse recession with depression. According to economists, recession only occurs when an economic decline spreads out through a period of more than six months. In contrast, depression occurs when a severe economic decline lasts for multiple years. Since 1824, there has been only one depression in 1929 and a total of 33 recessions. Whenever such scenarios occur, governments formulate and evaluate different policies to save their respective economies: they include monetary or fiscal policies. Fiscal policies address the collective government’s revenue collection and spending. On the other hand, monetary policies address the total supply of money in circulation and the management of interest rates. Moreover, these policies are applicable whenever there exists an economic slowdown or deteriorating economy in a country. However, if these policies are not well structured, their implementation will lead to more harm than good to the country’s economy. Therefore, such policies require extensive analysis for them to be effective in stabilizing the economy through stabilizing fluctuations, thus leading to economic recovery.
Consequently, for the government to enact a fiscal policy (expansionary or contractionary), there must exist a certain economic shock that affects the livelihood of its citizens. For example, a pandemic that affects the economic security of a country can arise, leading to adverse effects of production and distribution of goods and services across a country. A good example would be the current COVID-19 pandemic, which has affected not only the United States’ economy but also the global economy. The pandemic has resulted in disruption of the manufacturing sector, the transport sector, and the entire global business sector, which could lead to a long-lasting recession. The fact remains that COVID-19 has resulted in immense pressure on the equities market and significantly led to adverse effects on stocks, companies, real estate, and manufacturing. According to the Organization for Economic Co-operation and Development, the global economic growth could drop to a half in 2020 due to the virus spread. Therefore, different countries may react distinctively to the pandemic, either through the formulation of monetary or fiscal policies (Cowen & Tabarrok, 2015) . Undoubtedly, the coronavirus pandemic has led to huge losses in the corporate world, and the situation will continue unless the virus is contained and legal policies implemented.
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Formulation and implementation of the fiscal policy belong to different arms of the government, depending on the country’s constitution. For instance, in the United States, both the executive and legislative branches are responsible for the formulation of the fiscal policy. The Office of the President, together with the office of the Secretary of the Treasury, is the influential offices in the fiscal policy formulation in the executive branch. At the same time, Congress represents the legislative branch. After intense participation and deliberation from the two branches, a comprehensive fiscal policy is drafted and formulated. However, the policy cannot be implemented without approval from both the Senate and House of Representatives. Therefore, the respective institution requires such approval to put the policy into practice. However, the judicial arm can have significant impacts on the fiscal policy since it can declare such a measure as unconstitutional if it intends to affect the national economy negatively. Due to this, the institutions involved in formulating fiscal policies ought to conduct extensive analysis on the impacts of the policy.
Figure 1 ; A graph showing the relationship of how increase in AD results to increase in GDP
The expansionary fiscal policy has a significant effect on the aggregate supply-aggregate demand curve. For instance, such a policy increases the aggregate demand resulting in a higher GDP and inflation. By doing so, the unemployed resources get back into their productive state, leading to the stimulation of economic activities, which in turn enables the economy of a country to recover faster (Cowen & Tabarrok, 2015) . Moreover, when governments engage in expansionary fiscal policies, taxes are lowered to facilitate the livelihood of their citizens. When the taxes are lowered, the aggregate demand for goods in the market increases. At this time, the citizens have much to spend due to low taxes; therefore, the production of goods will also increase to meet the growing aggregate demand. In turn, an increase in economic production triggers a long-run increase in economic growth through an increase in the GDP. For example, if a government increases its investments in public projects, multiple jobs would be created. Besides, Cowen and Tabarrok (2015) affirm that if the taxes are reduced within this period, the income of these individuals will increase, leading to an increase in aggregate demand on commodities. However, this scenario the high demand in the economy will result to an inflation. For instance, if a country’s economy is almost at full capacity, the introduction of an expansionary fiscal policy would result in crowding out as well as high inflation. However, if the country is at a deep recession state, minimal crowding out or inflation will prevail. At the same time, the GDP will increase tremendously, leading to a long-run increased rate of economic growth.
On the contrary, the implementation of the expansionary fiscal policy may not work according to the government’s plans. Such a scenario occurs when the government spends its resources inefficiently and wastefully. For instance, if the governments cut off income taxes and invest in education rather than public works, disincentives to work can prevail within the public leading to reduced productivity than before. Reduced productivity will lead to a reduction in revenue collection, thus an increased deficit in the government’s budget. The government will have no other option apart from borrowing from local or international institutions to reduce the deficit. Such a case exhibits a failure of expansionary fiscal policy. Moreover, several economists have criticized the implementation of expansionary fiscal policy as a tool to curb recession due to the prevalence of costs that are not highlighted by the AS-AD graph. These costs include costs incurred during government borrowing, fluctuation of prices of goods, and increased inflation. Moreover, if the government borrows huge amounts of money, crowding out may occur, and private sector spending may fall. Therefore, individuals ought to realize that the reduction of taxes will result from increases in taxation in the future to pay off government debt.
In conclusion, the elected individuals in the government have to ensure that citizens live to the best standards ever. Moreover, the decisions made by the government should cater to the interests of the minority groups in society through the introduction of effective programs and policies. According to the public choice theory, legislators should cease from enacting policies which extract large budgets from informed economic experts. Also, oversight committees should avoid constraining bureaucratic discretion to protect public resources. Both fiscal and monetary policies should not only be implemented during an impending recession but also whenever the government wishes to safeguard the economy of the country as well as improving the livelihood of its citizens. By doing so, the government addresses some economic problems such as unemployment. However, the responsible arms government should integrate many aspects before implementing such policies since they may lead to adverse effects to the country’s economy. Failure to this, judiciary branch will have no other option apart from halting the policies from being implemented. Undoubtedly, the global economic shock due to the current Covod-19 pandemic will lead to numerous fiscal and monetary policies to safeguard not only specific countries’ economies but also the global economy.
References
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics . Macmillan International Higher Education.
