Economic Meaning of Recession
An economic recession is a significant decline in a country’s economic activity such as industrial production, internal trade, real income, and employment that lasts for a considerably long period to cause an economic crisis. This economic decline can be measured by a negative economic growth in the gross domestic product (GDP) of a country registered within two consecutive quarters. The 2008 Great Recession was as a result of the irrational excitement in the housing market in which people lost their wealth leading to sharp consumer spending cutbacks (Jagannathan, Kapoor & Schaumburg, 2013). The huge money inflow overwhelmed the US economy in adjusting to the incentives thereby causing panic in the banking industry.
In addition, from a larger world perspective, the Great Recession can also be attributed to shock in the world economy caused by the rapid increase in the developed world’s effective workforce supply stimulated by the globalization of upcoming economies and coupled with innovations in transportation and information technology (Jagannathan, Kapoor & Schaumburg, 2013). This force met world economies unprepared and, therefore, unable to align with the global macroeconomic adjustments hence creating a financial crisis. Since the widespread global recession caused significant setbacks in the world’s developed and developing countries, numerous national and international policy frameworks were adopted and implemented to help suppress similar future crises.
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During the Great Recession, interest rates fell significantly to help economic stimulation. The economic downturn also saw the unemployment rate rise from 5% in December 2007 through 7.2% in 2008 to 10.1% in October 2009 (Jagannathan, Kapoor & Schaumburg, 2013). The long-term effects of the economic turndown were manifested through the declined quality of life and standards of living of Americans during and after the recession. Families became destabilized and their health and overall well-being deteriorated as they drained their savings to meet the high cost of living. In addition, businesses, both small and large, also got affected by reduced profits and investment in research and development to find ways of survival.
Fiscal Policies
Fiscal policies are government spending and tax policies that guide macroeconomic activities such as economic growth, employment, aggregate demand, and inflation to stabilize a country’s business cycle and spur economic growth. During the Great Recession, the Congress and the White House formulated the fiscal policy that deals with the changes in government spending and taxation. An expansionary fiscal policy comes into play during economic downturns whereby the government raises her spending and lowers tax rates in order to increase overall spending and stimulate companies to hire more personnel and increase production (Liborio, 2011).
Following the 2008 economic recession, the Congress enacted the Economic Stimulus Act of 2008 and the $787 billion American Recovery and Reinvestment Act of 2009 in order to promote economic growth by cutting tax and other benefits amounting to $288 billion and an additional $150 billion for the energy, transportation, and education sectors (Rich, 2013). There is controversy over the role of such expenditures with some economists holding that the expenditure may lead to future economic development while others contending that they may promote higher future taxes thereby discouraging present business investment.
Monetary Policies
In the United States, the monetary policy that regulates the money supply and the federal funds rate is the function of the Federal Reserve (Liborio, 2011). The changes in the federal funds rate directly affect other market interest rates such as corporate bond rates, mortgages and auto loans. On the other hand, savings and investment decisions are dependent on the changes in the interest rates. The expansionary policy raises the supply of money to reduce unemployment, foster consumer spending and private sector borrowing, and promote economic growth. The Federal Reserve can adopt approaches such as open market operations where government bonds are bought or sold to control the money supply (Rich, 2013). Also, by lowering or zero-rating interest rates, companies are made to take bigger debts to invest and hire, consumers make bigger purchases, and investors are motivated to use their savings to invest in stocks and other assets.
During the 2008 economic recession, the Fed reduced the federal funds rate from 5.25% in September 2007 incrementally to lower than 0.25% in December 2008. The guidance to keep the federal funds rate at its effective lower bound (ELB) was initiated to provide monetary stimulus through reduced interest rate structures, thereby increasing inflation expectations and lowering real interest rates. Further lowering of target rates to zero lower bound were adopted and extended up to mid-2013 due to the slow recovery from the Great Recession (Rich, 2013). Also, the Fed pursued quantitative easing as an intervention to lower long-term interest rates and facilitate credit flows. This approach was an attempt to increase the supply of money thereby providing incentives for employment and increased investment since the federal funds rate was near zero but the unemployment rate remained high. Quantitative easing refers to a nontraditional policy that involves credit easing programs and large-scale asset purchase e.g. mortgage-backed securities (MBS) and long-term Treasury securities (Rich, 2013).
Conclusions: Extent of Success of Fiscal and Monetary Policies in Economic Growth Restoration and Unemployment Reduction
The fiscal and monetary policies that were adopted and implemented by the federal government following the Great Recession have seen the economic growth restored and the unemployment rate reduced significantly (Andolfatto, 2015). On average, the real GDP has improved from 15.02 to 18.05 trillion dollars in 2009 and 2017 respectively, and the unemployment rate has reduced from 9.6 % in 2010 to 4.4 % in 2017 (Statista, 2018). The Fed’s monetary policy interventions continue to adjust in efforts to spur economic growth and attain its full statutory function. After the end of the Great Recession, in order to achieve financial stability and regulatory reform, Fed has continually made changes in its communication policies and put into place additional large-scale asset purchase programs such as the QE2 and outcome-based purchase program (Rich, 2013).
References
Andolfatto, D. (2015). A model of U.S. monetary policy before and after the Great Recession. Review , 97 (3), 233-256. doi:10.20955/r.97.233-56
Jagannathan, R., Kapoor, M., & Schaumburg, E. (2013). Causes of the Great Recession of 2007-9: The financial crisis is the symptom not the disease. Journal of Financial Intermediation , 22 (1), 4-29. doi:10.3386/w15404
Liborio, C. S. (2011, March). Fiscal and monetary policy in times of crisis. The Liber8® Economic Information Newsletter [Missouri], p. 2.
Rich, R. (2013, November 22). The Great Recession. Retrieved from https://www.federalreservehistory.org/essays/great_recession_of_200709
Statista (2018). Unemployment rate in the United States from 1990 to 2017. Retrieved from https://www.statista.com/statistics/193290/unemployment-rate-in-the-usa-since-1990/
Tanzi, V. (2015). Fiscal and monetary policies during the great recession: A critical evaluation. Comparative Economic Studies , 57 (2), 243-275. doi:10.1057/ces.2014.36
