Mr. Emanuel, in the current economic climate, the Obama administration’s course of action has been to pursue aggressive countercyclical fiscal policies designed to prevent further economic deterioration. Critics of these policies argue that: 1. The current fiscal stimulus is ineffective and has done little to create new jobs at a significant cost. 2. Monetary policy is a more effective lever to reduce unemployment and smooth the business cycle, due to its shorter implementation lag and ability to act in small multiples. However, despite these arguments, significant evidence demonstrates the continued need for continued fiscal stimuli, in addition to the monetary policies already undertaken: 3. With interest rates floating near 0% and several extraordinary measures still in place, the Federal Reserve has reached the limitations of monetary policy, necessitating continued fiscal action. 4. The American Recovery and Reinvestment Act has demonstrated success in reducing unemployment, demonstrating the potential for fiscal policy in the current climate. 1. Current Fiscal Stimulus Many economists critical of the Obama administration have argued that sustained deficit spending negatively affects the economy. Prior to the passage of the ARRA, Feldstein stated that “spending should be big, quick, and targeted at increasing aggregate activity and employment.” However, Feldstein later argued that since a large portion of the stimulus package is designed to pay out slowly, it inherently works against the intent of countercyclical policy. John Taylor, creator of the seminal rule of monetary policy, agrees with this assessment, additionally citing the statistical insignificance of the 2001 and 2008 tax rebates at increasing consumer s... ... middle of paper ... ...n inaccessible in the current recession. Additionally, a large fiscal stimulus can reduce loan defaults, increasing liquidity and reducing the need for exceptional lending programs at the Federal Reserve. With the possibility of a double-dip recession still looming, prudent fiscal policy calls for a stimulus that will smooth GDP growth for several years. During a normal recession, critics would be correct in their claims that monetary policy would be ideally suited to smoothing the business cycle. However, due to the financial crisis, many standard monetary tools have been exhausted, necessitating extraordinary fiscal stimuli. The ARRA and other discretionary fiscal measures have been successful in staving off a further reduction in employment and GDP, and the current recession has demonstrated that fiscal policy has been effective at enacting economic recovery.
This paper is structured as follows. In order to better understand the Great Recession, the first section includes an examination on some of the key causes. Section two outlines some of the fiscal policy responses made by the government to the Great Recession. In the third section, relevant extant literature relative to studies on the fiscal policy implemented in response to the Great Recession will be discussed with a focus on potential problems. For problems noted, recommendations for resolution will be included. The objective of this paper is to consider relevant problems that might require further consideration in a research project about the long-term after effects of fiscal policy implemented by the U.S. government in response to the Great Recession.
Allowing market participants to begin putting their resources back to work in areas they’d be most beneficial. President Obama’s fiscal responsibility summit last February indicated that he understood the urgent need for fiscal discipline. Congress’s enactment of the American Recovery and Reinvestment Act and President’s proposed budget makes the goals of a sustainable budget and addressing nations longer term fiscal priorities, such as entitlement liabilities, even more elusive. The administrations recently released midsession reviews from the office of management and budget that over the next 10 years the accumulated deficits will total $9 trillion which means that the debt held by public will be a staggering 77% of GDP in 2019. If the debt level continues to grow faster than our economy, the US will owe more than it makes.
The American Recovery and Reinvestment Act was signed into law by President Obama on February 21, 2009. The law had three major goals which were all aimed at stimulating a sluggish US economy. The first goal was to create new jobs and save existing ones by tax credits for hiring new employees. The second goal was to spur economic activity and investment in long term growth by increasing the amount of business asset that could be acquired by companies while allowing for immediate deductions for the cost of the assets as well as numerous tax credits for individuals and businesses. The third goal was to foster unprecedented levels of accountability and transparency in government spending by requiring recipients of recovery act funds to post acknowledgements on the Recovery.gov website.
In this paper, I will explore the definition of monetary policy, the objectives of the monetary and the monetary policy bases.
Arestis, P., & Sawyer, M. (2010). The return of fiscal policy. Journal Of Post Keynesian Economics, 32(3), 327-346. .
This policy worked well until 2007 when the US was faced with a financial crisis. These was caused by both the monetary policy and fiscal policy..
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Our country has experienced some trifling times throughout these two decades. Due to these experiences our economy has taken a great burden which has resulted in unsubstantial unemployment rates, fluctuating interest rates, unstable GDP, and an increase in taxes. Our behavior when involved in a national crisis is, we panic and turn to the government to fix the chaos and restore peace. The federal government’s responsibility to its citizens is to respond to the changes in the economy by using the necessary tools to re-establish stability. Expansionary Fiscal and Monetary Policies are economic policies used by the government to level out the extreme swings in our economy.
Fiscal policy has played an important role in sustaining low inflationary pressures. In response to the Government’s excessive spending in the 2008-09 Budget deficit, the Government had also augmented the size of the forecast Budget surplus to $1.0bn in 2012/13, a $16.9 bn improvement from that forecast in the mid year economic fiscal outlook with the objective of maintaining low inflation in the economy as public demand decreases.
The subject of controlling the national economy presents professionals and ordinary citizens alike with fodder for lively discussion and debate. It is also a topic whose popularity ebbs and flows with the times. The focus in recent years has been on the use of monetary policy. But do not tell that to the politicians. Some people will not let go of what they are familiar with and to what gets them votes. So Congress and the President constantly battle to find the most “correct” fiscal policy to pursue given their assessment of the economic conditions at any point in time. And therein lays a potential weakness in the argument that favors the use of fiscal policy to smooth the troughs and peaks of the United States economic machines.
In time of economic crisis the government has a choice to cut spending or increase spending for public goods and services. “In 2009, Congress passed the American Recovery and Rein- vestment Act, which authorized $787 billion in spending to promote job growth and bolster economic activity”(Stratmann/Okolski 3). John Maynard Keynes, an economist of 20th century, suggest that the government should run a deficit if it will create jobs and increase capital gain. This theory support the current stimulus package that has been introduce during President Obama’s term. Although the flaw with this concept is that it makes the assumption the government has done studies and understands which areas needs the funding the most and knows where it will be beneficial, realistically that is not true. “Federal spending is less likely to stimulate growth when it cannot accurately target the projects where it will be most productive” (Stratmann/Okolski 2). This can be seen because political figures will spend money where it directly supports their needs as well. For instance, the political figure would rather spend money to things that will yield a p...
... expansionary monetary policy to fight recession , as well as other complementary measures of macroeconomic policy , it can be relatively quick and easy , even in the very short term , restore aggregate demand , and thus lead to a balancing of aggregate supply and demand . But stability and balance over the long term can not be sustained without economic growth , and thus increase aggregate supply .
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
When focusing on real gross domestic product the stimulus helped increase it. The ARRA was signed into law by President Obama in February of 2009, it was in March of 2009 that the real gross domestic product began to increase once again after having plummeted drastically for the previous year. The real gross product was immediately affected by the ARRA making it a success in this aspect. However, when focusing on the civilian labor force it was also immediately impacted by the ARRA, however, the positive effects did not last as long as those for real gross domestic product. The civilian labor force in March of 2009 in thousands was roughly 154,000 by May of 2009 it increased in thousands to 154,747 but then began to decrease drastically once again. The civilian labor force has steadily increased since the recession reaching a high of 159,286 in thousands in March of 2016. The civilian labor force participation rate continued to decrease after the ARRA was signed from July of 2009 to December of 2009 the civilian labor force participation rate decreased by 1.1%. It has since continued to steadily decrease reaching a low of 62.4% in September of 2015. The civilian unemployment rate in March of 2009 was 8.7%, it continued to increase until October of 2009 where it reached 10%. The unemployment rate then began to slowly decrease. The unemployment rate stayed closer to 10% than dropping to or below 8.7%