A Look at Recession's Fiscal and Monetary Policies

A recession can be defined as “A significant decline in activity across the economy, lasting longer than a few months,” (Investopedia) and can be indicated by macroeconomic indicators such as Gross Domestic Product, investment spending, employment, household income, business profits and inflation all falling, while at the same time unemployment and bankruptcies rise.

Monetary policy is a policy that determines the rate and size of growth of the money supply and has a direct effect on the interest rate in order to maintain stable prices and a low unemployment rate. Monetary policy is maintained through actions such as increasing the interest rate and changing the amount of bank reserves. Fiscal policy is the use of government expenditures (spending) and revenues (taxes) in order to influence the economy. (O’Sullivan, 2003). Fiscal policies attempt to control inflation, improve unemployment rates and influence interest rates in order to better control the economy.

The Great Recession of 2008 started with the United States subprime mortgage crisis, which was caused by an increase in subprime mortgage delinquencies and foreclosures; other factors include the burst of the real estate bubble, where the real estate industry peaked in 2006 at unsustainable levels that led to a collapse. Additionally, from 2002 to 2008 it was exceptionally easier to obtain credit, this led to high risk lending and borrowing practices. The recession started in the United States, but eventually the effects were felt worldwide, making the recession of 2008 the worst global recession since World War II. The Federal Reserve, Securities and Exchange Commission and the Treasury acted quickly to implement policies in response to the economic crisis. (Kitromilidies, 2012)

In 2008 the Economic Stimulus Act was passed with the goal of stimulating the economy through tax incentives and targeted government spending; the total cost of the bill was estimated to be 152 billion dollars. (Hopson, 2008). Targeted individual tax rebates were given out in increments of 300 dollars per person, or 600 dollars per married couple if filing jointly, for individuals who made less than 75,000 dollars a year or 150,000 dollars for married couples. (Hopson, 2008). Additionally, individuals received 300 dollars per dependent child, with the total rebate not exceeding 600 dollars per person or 1200 dollars per married couple; a total of 100 billion dollars of tax rebates were issued. The goal of the Economic Stimulus Act was to increase consumer spending through the rebate and increase business spending through targeted tax incentives. (Hopson, 2008)

Many economists were skeptical that the Economic Stimulus Act rebates would be spent by consumers quickly and instead suggested that the stimulus would be spent over a period of many years, while many consumers would choose to save during slow times, rendering this fiscal policy useless. A study conducted during the first wave of rebate checks showed that consumer spending on durable goods was increased by 6 percent in the first week that individuals received the stimulus rebates and 3.5 percent in the weeks following. (Broda, 2008) The stimulus rebate was most effective for households with low income, who were less likely to have money in an emergency savings fund; low income households increased their spending on non-durable goods by twice the amount of typical households. Overall, the Economic Stimulus Act of 2008 can be deemed a successful policy because it helped fuel an increase in consumer spending that reduced the severity of the economic slowdown in the United States. (Broda, 2008)

The American Recovery and Reinvestment Act of 2009 (ARRA) was an economic stimulus packaged signed into in February of 2009; the goal of ARRA was to immediately save and create jobs, invest in infrastructure, health, renewable energy and education, while also helping the people who were most impacted by the recession by providing temporary relief programs and had a final price tag of 831 billion dollars between 2009 and 2013. Among Federal programs that comprised ARRA include:

1. 1. ·155 billion dollars in healthcare, which included the enactment of the Health Information Technology for Economic and Clinical Health Act.
   2. · 100 billion dollars in education.
   3. · 82 billion dollars in aid to low income workers.
   4. · 21.5 billion dollars for energy infrastructure. (Pew Research)

Impact of the American Recovery and Reinvestment Act of 2009

According to reports issued by the Congressional Budget Office and independent macroeconomic firm Moody’s, an estimated 1.6 to 1.8 million jobs were saved or created under the stimulus plan, with a forecast of 2.5 million by the time the stimulus is completed. (Leonhardt, 2010) Additionally, the Congressional Budget Office estimates that the stimulus has boosted the economy by 3.5 percent and lowered unemployment rate by 2.1 percent. (Leonhardt, 2010)

Conclusion

The recession of 2008 was the worst recession since World War II, which led the Federal Reserve, Securities and Exchange Commission and the Treasury to implement policies in response to the economic crisis, such as the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009. These policies acted to increase consumer spending, while saving and creating jobs that reduced the severity of the economic slowdown in the United States.