The American economy experienced the worst performance during the 2007 to 2008 recession. As Figure 1 shows, the US GDP dropped from 2.7% in 2006 to -0.3% in 2008. This can be explained by the financial crisis that occurred due to sublime mortgage crisis (Álvarez-Franco & Restrepo-Tobón, 2016). The US economy recorded the lowest economic growth in 2009 at -2.8%. According to Pippin, Mason, and Carslaw (2008) the Economic Stimulus Act which was enacted in 2008 encouraged consumer spending. The outcome is clearly demonstrated by Figure 1, where the GDP recovered in by 2010.
Table 1: Unemployment Rate, Inflation Rate, and GDP Growth
| Year | Unemployment rates | GDP growth | Inflation rates |
| 2006 | 4.4 | 2.7 | 3.42 |
| 2007 | 5 | 1.8 | 2.54 |
| 2008 | 7.3 | -0.3 | 4.08 |
| 2009 | 9.9 | -2.8 | 0.09 |
| 2010 | 9.3 | 2.5 | 2.72 |
| 2011 | 8.5 | 1.6 | 1.5 |
| 2012 | 7.9 | 2.2 | 2.96 |
| 2013 | 6.7 | 1.7 | 1.74 |
| 2014 | 5.6 | 2.6 | 1.5 |
| 2015 | 5.0 | 2.9 | 0.76 |
| 2016 | 4.7 | 1.5 | 0.73 |
| 2017 | 4.1 | 2.3 | 2.07 |
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Figure 1: US GDP growth from 2006 to 2017
Unemployment
The unemployment rate is yet another important macroeconomic indicator that defines the American economy over the last decade. Evidently, the rate of unemployment increased slightly between 2006 and 2007 from 4.4% to 5%. However, as Figure 2 shows, the unemployment rate increased rapidly during the 2007 recession. For example, the employment rate increased from 5% in 2007 to 9.9% in 2009. This can be explained by the number of companies that closed down during the 2007 recession (Sahin, Song, & Hobijn, 2010).
Figure 2: Unemployment rate from 2006 to 2017
Inflation Rate
As Figure 3 demonstrates, the inflation rate was one of the most unstable economic indicators during the 11-year period (2006-2017). For example, the inflation rate increased from 2.54% in 2007 to 4.08% in 2008 before dropping again to 0.09 in 2009 (Figure 3). It is only between 2015 and 2016, where the inflation rate remained relatively stable. However, as Figure 3 shows, an upward trend is evident in 2017, which is a clear indication that inflation rate is an unpredictable economic indicator.
Unemployment Rate, Inflation Rate, and GDP Growth
Figure 4 brings together the unemployment rate, inflation rate, and the GDP growth to show the relationship between the three economic indicators. Evidently, low GDP growth is associated with high unemployment rate. The highest unemployment was recorded in 2009. During the same year, the US registered the lowest economic growth in terms of GDP. As noted by Pippin et al. (2008), increased employment makes it possible for more people to afford goods and services. Therefore, the reduced GDP growth is due to the low purchasing power caused by unemployment.
Figure 4: Unemployment Rate, Inflation Rate, and GDP Growth from 2006 to 2017
Analysis of Economic Policies
Cause of Recession
The findings provide crucial insights regarding the2007-2008 economic crisis. According to Sahin et al. (2010), the recession was caused by the subprime mortgage crisis, which was associated with unregulated use of derivatives. According to Sahin et al. (2010), the fact that many household reduced spending forced many companies offering goods and services scale down. Reducing the number of employees is a way of cutting spending to survive financial crisis. This causes the high unemployment rate since companies was keen on cutting down their human resources to survive the crisis. The bank crisis in 2007 meant that it was the banks that were affected not the American consumers. However, the situation worsened and the effects reached the consumers in 2008 leading to high inflation rate as Figure 3 illustrates. For example, subprime mortgage crisis led to an increased in inflation rate since homeowners could not sell the houses that they could not pay for.
In response, the Federal Government of the United States came up with monetary and fiscal policies to curb the effects of the recession. For example, the Fed created the Term Auction Facility (TAF) to allow banks needing liquidity to borrow from the Federal Reserve anonymously (Armantier, Krieger, & McAndrews, 2008). In 2008, the Congress passed the Economic Stimulus Act aimed at providing tax rebates of $300 to $1200 for low income and middle-income families (Pippin et al., 2008). In the same year, the Fed created another credit mechanism known as the Term Securities Lending Facilities (TSLF).
Expected and Actual Outcome
The policies played a major role in assisting the US to recover from the recession. For example, the TAF, which came into effect in 2007 helped in reducing the inflation rate. According to Armantier et al. (2008), the TAF succeeded in helping troubled sectors of the financial industry to access the much-needed liquidity. Doing so without any adverse publicity associated with traditional borrowing help in avoiding bad reputation that could affect the stock price of banks listed in security markets. However, as Figure 4 shows, the expected outcome in terms of GDP was not achieved. Regarding the Economic Stimulus Act of 2008, it was expected that consumer spending will be improved. The actual outcome shows that this objective was achieved considering the economic recovery as shown in Figure 1. Although slow, this fiscal policy reduced the impact of the recession on households and encouraged consumer spending. This is clearly shown by the reduced unemployment rates and increased GDP growth after its enactment in 2008. Regarding TSLF, the policy helped in stimulating growth and reducing unemployment rates. According to Cecchetti (2009), the TSLF provided a platform for banks to exchange high-grade mortgage-backed securities for more-liquid treasury bills. This expectation was met through a positive economic growth.
Classical and Keynesian Viewpoints
The changes in GDP, inflation rate, and unemployment provide crucial insights regarding the applicability of the classical and Keynesian approaches. For example, classical economists argue that free markets lead to an efficient outcome. Also, classical economists believe in the idea that markets are self-regulating. In contrast, Keynesian economists place a greater emphasis on expansionary fiscal policy that is applicable during recession to stimulate economic growth. From the findings, it is clear that the latter is more applicable than the former in the case of 2008 financial crisis. For example, the unregulated practices in the banking system brought the recession in the first place. In contrast, fiscal policies supported by the Keynesian economic viewpoint helped in assisting the US economy to recover.
Conclusion
In summary, it is important for policy makers to make informed decisions when enacting policies that affect the livelihood of more than 300 million Americans. In this case, the example of classical and Keynesian economic viewpoint shows how policymaker can save a collapsing economy by subscribing to superior fiscal and monetary policies. In my view, members of the society have a crucial role to play in the decision-making process. For example, knowing the standpoint of politicians and how such policies matters can help in electing leaders who support the best policies.
References
Álvarez-Franco, P.,B., & Restrepo-Tobón, D.,A. (2016). Managerial efficiency and failure of U.S. commercial banks during the 2007-2009 financial crisis: Was this time different? Ecos De Economía, 20 (43) Retrieved from https://search.proquest.com/docview/1924614262?accountid=776
Armantier, O., Krieger, S., & McAndrews, J. (2008). The federal reserve's term auction facility. Current Issues in Economics and Finance, 14 (5), 1-10.
Cecchetti, S. G. (2009). Crisis and responses: The federal reserve in the early stages of the financial crisis. The Journal of Economic Perspectives, 23 (1), 51-75.
Pippin, S., Mason, R., & Carslaw, C. (2008). Tax rebate checks as economic stimulus: Consequences of the economic stimulus act of 2008 for individual taxpayers. The CPA Journal, 78 (8), 6-10.
Sahin, A., Song, J., & Hobijn, B. (2010). The unemployment gender gap during the 2007 recession. Current Issues in Economics and Finance, 16 (2), 1-7
