Demand-Side Policies and 2008 Recession, Research Paper Example

Economic recession is the period between a peak and a trough and is marked by a significant decline in economic activity across the economy. A recession could last from few months to more than a year (National Bureau of Economic Research). Fiscal policy is the use of government spending and taxation to influence the economy (Horton & El-Ganainy). Monetary policy refers to actions of the central bank which determine the size and rate of growth of the money supply (Investopedia).

One of the U.S. government’s earliest initiatives to encourage customers to spend more was the Economic Stimulus Program of 2008 under which the government sent over $100 billion of cash as tax rebates to the individuals and families (Taylor, 2008). The U.S. Government also allowed businesses to take advantage of temporary accelerated depreciation (Auerbach, 2009) which allowed businesses to pay lower taxes by showing lower income. The Congress passed another fiscal stimulus program titled “American Recovery and Reinvestment Act of 2009” which included several programs such as expanded unemployment compensation, infrastructure spending, and aid to state and local governments (Auerbach, 2009).

The U.S. Government also bailed out several organizations in the private sector through the Troubled Asset Relief Program (TARP) to restore investors’ confidence and create liquidity in the financial markets (Investopedia). The government also took steps to save the automobile sector by restructuring GM’s and Chrysler’s operations (The Department of the Treasury, 2012).

As far as monetary policy is concerned, the Fed reduced target funds rate from 5.25 percent in June 2007 to 2 percent in April 2008. The funds rate was lowered to only 0.25 percent in December 2008 (New York Fed) where it continues to stand as of today (Bankrate.com).

The tax rebates under the Economic Stimulus Program of 2008 failed to make a difference between the consumers didn’t spend as much as the government expected (Taylor, 2008). The U.S. Government’s measures to save the auto industry have yielded positive results by saving more than one million jobs and the auto industry has further added 230,000 jobs since the rescue (The Department of the Treasury, 2012). The government intervention in the economy through banks bailout also saved the economy from total collapse and even legendary investor Warren Buffet praised government’s actions during the early days of the crisis (Funk, 2010).

Even though Fed has kept the interest rates low for quite a time, the unemployment rate remains high by historical standards though it has gradually declined over the last two years. The low interest rates have also failed to achieve the objectives set by the Fed which may be why median household income is on a downward trend since at least 2007 (The Department of the Treasury, 2012) due to high unemployment rate which makes it more likely for workers to accept lower wages.

The recovery has been slow which is why the Fed continues to keep interest rates low but the results of government actions should be seen in the context of the severity of the crisis as well as the economic situations in other parts of the world. Despite being the largest economy in the world, U.S. economic health is much better than many developed economies in Europe.

References

Auerbach, A. J. (2009, February). Fiscal Policy in Recession. Retrieved November 21, 2012, from http://www.cesifo-group.de/portal/pls/portal/docs/1/1191490.PDF

Bankrate.com. (n.d.). Fed Funds Rate. Retrieved November 21, 2012, from http://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx

Funk, J. (2010, November 17). Warren Buffett NYT In Op-Ed: Thanks For The Bailout, Uncle Sam! Retrieved November 21, 2012, from http://www.huffingtonpost.com/2010/11/17/warren-buffett-nyt-in-ope_n_784705.html

Horton, M., & El-Ganainy, A. (n.d.). Fiscal Policy: Taking and Giving Away. Retrieved November 21, 2012, from http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm

Investopedia. (n.d.). Monetary Policy. Retrieved November 21, 2012, from http://www.investopedia.com/terms/m/monetarypolicy.asp#axzz2Cr75dfSC

Investopedia. (n.d.). Troubled Asset Relief Program – TARP. Retrieved November 21, 2012, from http://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp

National Bureau of Economic Research. (n.d.). The NBER’s Business Cycle Dating Committee. Retrieved November 21, 2012, from http://www.nber.org/cycles/recessions.html

New York Fed. (n.d.). Financial Turmoil Timeline. Retrieved November 21, 2012, from http://www.newyorkfed.org/research/global_economy/Crisis_Timeline.pdf

Taylor, J. B. (2008, November). The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Retrieved November 21, 2012, from http://www.stanford.edu/~johntayl/FCPR.pdf

Taylor, J. B. (2008, November). The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Retrieved July 29, 2012, from http://www.stanford.edu/~johntayl/FCPR.pdf

The Department of the Treasury. (2012, April). The Financial Crisis Response in Charts. Retrieved November 21, 2012, from http://www.treasury.gov/resource-center/data-chart-center/Documents/20120413_FinancialCrisisResponse.pdf