7 April 2019
Reviving an Economy in Recession
Assuming that the US has been experiencing economic conditions of a GDP decline of -2.3%, a current rate of 7.5% unemployment and an inflation rate of 0.2% over the past 6 months, the health of the US economy is currently at a period of recession. Using expansionary policies implemented through fiscal and monetary policies the economy is able to be revived and brought into health conditions across the nation.
Through the use of fiscal policy, an increase in government spending has the ability to create a rush in the amount of jobs and products we create in the US, directly impacting the economy. In the 2008 recession president Barack Obama used a strategy of increasing government spending by passing the Recovery Act. The Recovery Act created jobs by devoting $275 billion to federal grants, loans, and contracts that went out to contractors that were able to hire more workers. This had a trickle down impact, as when a worker got paid thanks to the grants given out by the Recovery Act, they were able to pay their mortgage, buy groceries, buy gas, while still having discretionary spending. This spending by the original worker, helped to ensure that other people kept their jobs such as the store cashier, the loan officer, or even the owner of the gas station. When they got paid, they also spent money and it had the same impact. Grants were also given to factories such as the GM factory in Detroit and in the Rust Belt. The factories were able to pay their workers, while their workers created products that would later end up in cars. When these workers got paid they had money to spend, which meant that the demand would go up while simultaneously helping increase the supply.
A decrease in taxes, such as the decrease that occurred thanks to the Economic Stimulus Act of 2008, is another great way to ensure a healthier economy. The Economic Stimulus Act of 2008 had a direct impact on the amount of taxes that employers were paying. When employers have to pay less taxes, that leaves more money in their bank accounts, meaning that they can create new jobs spending that money that they didn’t have to use to pay taxes. Businesses can also use that money to invest into new technologies and products for their factories, meaning that they can create new jobs and create new products that are able to up the demand thanks to the money that they are putting into their workers pockets.
Finally, reducing the discount rate is a key monetary policy that can help stimulate the economy during a recessionary time period. When the FED decreases their discount rate, the banks decrease the percent that it costs to borrow money. When banks do that, consumers and members of our economy are more willing to go out and borrow money in order to buy a new house, go to college, or a new car, due to the fact that money is cheaper to borrow. When banks decrease their discount rate, businesses are also more willing to go out and borrow money in order to expand production and higher more labor. The FED decreases the discount rate in the 2008 recession down to .25 percent, and that meant that business could go out and borrow money in order to add on new factories and stores, which created a demand for contracting business. The new places of work meant that more lower skilled laborers had a place to work.
Concluding, using fiscal policy strategies such as the increase of government spending and the decrease of taxes, while simultaneously implementing monetary policies of lowering the discount rate, would help stimulate the economy and get it back on track. This is due to the money flowing back into the hands of business which are able to create more jobs, and those laborers having more money to spend increasing the demand for goods and services.