The fiscal policy used during previous recessionary periods is the expansionary fiscal
policy. The expansionary fiscal policy allows the government to influence economic
conditions by providing tax cuts and increasing discretionary government spending.
The government may lower tax rates or increase spending to encourage demand and
spur economic activity. Conversely, to combat inflation, it may raise rates or cut
spending to cool down the economy, in which we are experiencing at this moment
with current inflation.
With COVID-19, the government had its “lesson learned” from the past recession in
2008 and before the pandemic turmoil hit the market, the Fed was offering $100
billion in overnight repo and $20 billion in two-week repo. Throughout the pandemic,
the Fed significantly expanded the program—both in the amounts offered and the
length of the loans. During the pandemic, unemployment rates were not as high as
when the recession hit. Also the housing market even went up about 11% or so
during the pandemic. When the great recession hit, the housing market went
“downhill” as borrowers could not keep up with payments and there was not as
much help from the government then, so many lost their homes or had to short sell
and not get the full equity or value of the house.
The fiscal policy used during previous recessionary periods was expansionary. The
government can influence economic conditions through tax cuts and increased
discretionary government spending under an expansionary fiscal policy. During the
COVID-19 pandemic, mortgage forbearance provided enormous relief to homeowners.
However, for many borrowers, it will come to an end in the coming months, and
when it does, the focus will shift to the adequacy of the loss mitigation toolkit.
Naturally, industry experts will look to the Great Recession for guidance and lessons
learned. When they do, it is critical that they understand the differences between the
two economic crises. Look at home price appreciation and unemployment rates to
understand the differences between the crises. These two variables are important in
explaining mortgage delinquencies and foreclosures: negative equity and
unemployment. The unemployment rate rose from 4.5 percent in December 2006 to
10 percent in October 2009 during the Great Recession. The recovery was slow,
peaking at 6.9 percent in 2013 and falling to 3.5 percent in early 2020, just before
the pandemic. The COVID-19 unemployment shock, on the other hand, was much
larger, and the recovery was more robust, with the unemployment rate rising from 3.5
percent in February 2020 to 14.8 percent in April 2020, then rapidly falling to 6.9
percent in October 2020 and 6.1 percent in April 2021. However, the unemployment
rate remained stable from March to April 2021, implying that future job growth may
be more gradual. As the vaccine rollout continues, schools reopen in September,
people return to work, and the economy continues to recover, the unemployment rate
is expected to fall, allowing more borrowers to exit forbearance and resume full or
reduced mortgage payments. The COVID-19 crisis is unlike the Great Recession in
that home price appreciation has become an asset, and unemployment has been the
sole economic disruptor. Policymakers can ensure that the loss mitigation toolkit takes
this critical distinction into account. One limitation is the time from determining that
a recession exists to the time the fed can implement expansionary fiscal policy.
The government implemented programs during the great recession, include the
Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of
2009 or ARRA. The recession began in December of 2007, and the Economic
Stimulus Act was signed into law on February 13, 2008. This was a rapid turnaround
for implementing this fiscal policy. The ARRA was not enacted until 2009, after it
was seen that additional investment was needed.During the great recession, home
values plummeted by 25 percent from the 2006 peak to the 2012 trough. During the
pandemic, home prices increased by 11 percent.
During the great recession, the unemployment rate rose from 4.5 percent to 10
percent by the end of the recession. During the pandemic, the unemployment rate
increased from 3.5 percent in February 2020 to 14.8 percent in April 2020, before
declining swiftly to 6.9 percent in October 2020 and 6.1 percent by April 2021. This
data is summarized from (Neal and Goodman, 2021). During most recessions, the
fiscal policies that were used were the expansionary and a bit of the contractional. In
terms of the government it was expansionary where money was given in stimulus to
various sectors and within household contractionary. Where stimulus money was given
in areas such as loans and interest rates were varying, independent personnel were
monitoring their own spending. I for one cut back on my household spending, my
extras and all during the recession. In 2008 I was working in an industry with Real
Estate. Many of us lost our jobs and I saw the writing on the wall before it
happened. I saw people taking loans with income that for sure did not match. Their
monthly payments and revolving interest rate loans were way more than their monthly
income could support. I said to my old boss, this is going to crash and burn. One
year later most of us were unemployed.
With regard to the current fiscal climate, Covid definitely did a number on our
economy and what is now another recession. Have we been declared official yet as
being in a recession? The price of everything is high, interest rates are high, the
unemployment rate is high, although are they all being counted? Someone can't
collect unemployment if they haven't worked in 2 years. The stimulus money created
a population of people who don't want to work. The money should have been given
to those who lost their jobs, not to those who made less than a certain amount. I
saw people using the money for shopping and vacations. I saw people using the rent
and utility moratoriums as an excuse not to pay their bills and to hold on to money
even though they continues to work. The Covid recession was a ripple effect out of
illness and fear of the unknown and now folks are talking about how things should
have never been shut down because of the financial impact it has had on our
economy. People who worked from home want to continue to work from home in
their slippers. They want to be compensated for coming back in? I'm seeing it
everyday. I worked at my work location the entire time. There was no sitting at
home. What is the right and wrong answer? How does everyone feel about it?
The limitations of fiscal policy include: borrowing limitations, budget requirements, to
help with serious economic hardship.
The fiscal policy that has been used during the previous recession is the expansionary
fiscal policy. The expansionary fiscal policy influences the government's economy by
giving tax breaks and increasing the government's spending ability. Also during this
period the unemployment will increase and a decrease in income.
Fiscal policy during the COVID-19 recession differs from normal recessions because
COVID-19 created a force recession ( or is creating a forced recession) during a
normal recession is it usually the mismanagement of funds by the government.
During the COVID-19 recession there was a $5.2 trillion fiscal policy response to the
pandemic. The government provided the citizens tax breaks, PPP loans, stimulus
payments and a host of other breaks during the COVID-19 recession! The Hospitals
took a major hit during this recession.
During the normal recession the US government decided to go with a stronger
spending policy to combat the recession for example the 2008 recession. During this
recession the government decided to utilize tax break cuts to help stimulate the
economy. Also, during this recession other industries were hit like development
companies.
The states have limited options for dealing with a severe budget crisis or recession.
These restrictions include the need for a balanced budget, limitations on borrowing,
and a lack of revenue capacity to handle significant economic disruptions. Contrarily,
the federal government is theoretically exempt from dealing with these restrictions.
However, there is no agreement on what a "balanced budget" requirement entails.
Some states have exact rules for what makes a balanced budget, while others do not,
and the state's political culture influences whether the limits are enforced. The United
States is currently facing monumental fiscal challenges posed by the economic and
revenue impacts of the coronavirus pandemic. The COVID-19 crisis is very different
from the Great Recession; home price appreciation has become an asset, and
unemployment has been the sole economic disruptor. For the duration of a recession,
the government might lower taxes, or raise the aggregate demand by issuing tax
stimulus rebates. During the 2008 recession, passed a $152 million stimulus to
attempt to offset the recession. A major disparity in fiscal policy during the COVID-
19 recession is the amount of government spending in the health sector. CMS.gov
reports that federal government spending on health care increased by 36% in
2020.Another major difference is the industries most affected. During the Great
Recession, manufacturing industries as well as construction were the hardest hit, while
on the other hand, during COVID-19, industries most affected were hospitality
businesses. During previous recessionary periods the fiscal policy that has been used
is the expansionary fiscal policy. This policy allows the government to influence
economic conditions by providing tax cuts and increasing government spending. It
also includes transfer payments and rebates. It can increase discretionary government
spending, infusing the economy with more through government contracts. During a
recession aggregate demand in the economy falls which generally results in decreased
employment, lower business revenue, and lower business investments. Expansionary
fiscal policy can increase interest rates, growing trade deficit, and accelerating
inflation. COVID-19 is very different from normal recessions. Home price
appreciation has become an asset and unemployment has been the sole economic
disruptor. During the recession, construction and manufacturing were hit the hardest
where as though with COVID-19 it affected the leisure and hospitality industries
tremendously. During COVID-19 millions of people lost their jobs while businesses
closed and some never to reopen. All in all, a recession is totally different from a
recession although they have similarities I believe they have strong differences as
well. Covid-19 was something the world never experienced before. As we learned this
week, there are ‘automatic stabilizers’ put in place which help an economy suffering
from a recession attempt to recover quicker by dampening the effects felt during a
recession. Two things the government can do if a recession occurs, are to increase
government purchases and expand fiscal policy.
During the Great Recession, Social Security taxes were lowered to put more money
into American citizens pockets now instead of later to help boost the economy.
Before that Great Recession, Congress had passed the Economic Stimulus Act of
2008 which included a check to citizens to increase spending, which boosts the
economy.
One thing I’ve come to realize about Covid-19 is that circumstances outside of the
economy caused our recession. Whereas normally it seems like the economy lagging
causes a recession. The whole globe had stopped for months due to the pandemic,
causing output to stop as well. Due to the pandemic, the government provided
something called Pandemic Electronic Benefit Transfer (P-EBT). This was provided for
children that usually receive free or reduced lunches had they been in school. I think
this is a wonderful idea as a lot of children across America rely on school for most
of their meals.
One common fiscal policy action is to create tax cuts for businesses or individuals
which gives people or corporations more capital to make purchases for their
businesses for growth which increases demand overall. Another common fiscal policy
action in a recession is increased spending to establish new government jobs to
increase labor demand which will in turn lower the unemployment rate.
One more fiscal policy measures is to provide unemployment insurance. This policy
is automatic meaning it starts immediately and provided income for those affected by
the rate of unemployment. These policies are dictated by our president or by congress.
The FED can use several actions to help manipulate the economy. One way is to
Reduce the reserve ratio by offering loans that are of lower interest rates to attract
customers in turn helping raise economic growth. Another option is to Lower the
Federal Funds rate to free up money for the banks which can give them the means
to offer more attractive loans.
Lastly, the FED can use its own reserve money to buy government bonds which
transforms into income for the United States government putting more money in the
economy.
During the 2008 recession the world fiscal policy was to stimulate the economy so in
the United States we offered a stimulus plan we practice tax cuts to boost the
economy. The government decided that deficit spending can replace some loss during
the recession. The United States gave out a stimulus check, figuring that this would
encourage spending, putting the money back into the economy. During the covid-19
recession the government offered a stimulus plan, and also the government gave
companies money to cover employees in the event the employee come in contact
with covid-19. My job offered eighty hours of covid-19 pay. The government offered
unemployment; a lot of people lost their jobs during covid-19. The government
offered where people did not have to pay rent, or utilities. I knew people that did
not pay any rent or pay their utility bills. People took advantage, I feel and when it
came time to start back paying your rent and your utility bills. Some people could
not catch up their rent or utility bills. You had people not paying their rent and
when covid-19 ended it became hard for people to get caught up. There were people
collecting unemployment and working. There were individuals taking advantage of the
government during covid-19 and now that covid-19 is over the individuals that took
advantage are now suffering to get caught up. Unfortunately, the economy
experienced the collapse of the housing market caused by low interest rates, easy
credit, detrimental subprime mortgages, and overextended households.
The COVID-19 economic contraction was due to government shut-downs that affected
supply, as well as demand.
Expansionary fiscal policy stimulates AD and expansionary monetary policy increases
the money supply to promote and increase in AD.
When the economy enters a contraction, the Federal Government tends to respond
with a decrease in taxes and an increase in government spending.
When the economy enters a contraction, the Federal Reserve tends to respond with a
decrease in interest rates using the three monetary policy tools.
Both fiscal policy and monetary policy experience lag times.
Recognition Lag – the lag time between a change on the business cycle and the time
it takes for analysts to see the change in the data.
Implementation Lag – the lag time between seeing a change on the business cycle
and the time it takes for fiscal policymakers and/or monetary policymakers to
determine a resolution and to implement the resolution. In the US, fiscal policy has a
greater implementation lag time than monetary policy does.Response Lag – the lag
time between the policy implementation and the response by consumers and firms to
change behaviour.
Why are lag times significant?
What causes the lag times for fiscal policy?
What causes the lag times for monetary policy?
The Federal Reserve has been increasing interest rates to put the brakes on inflation
as we try to recover from the COVID-19 mandates, shut-downs, and restrictions;
however, the demand side is not the problem.The problem is the supply side.
What do you recommend for the optimum policy combination of fiscal policy and
monetary policy for the US economy to deal with COVID-19 caused downturn and
inflation?
I was not aware that health care spending increased that much. It makes sense, of
course. I remember during the great recession, many businesses reduced hours or
staffing. I don't recall the significant bounce-back effect that we've seen during the
pandemic. Many businesses that remain open are struggling due to the increased
volume after opening up again and the reduced staffing levels. I've seen these
symptoms in both the restaurant and hotel industries. This struggle is true both in
their business and supplier's enterprises, as well as the logistics challenges with
getting raw materials. We're experiencing both problems with available staff as well
as incoming raw material shortages at the company I work for as well.
Neal and Goodman, M and L (2021). Understanding the Differences between the
COVID-19 Recession and Great Recession Can Help Policymakers Implement
Successful Loss Mitigation.https://www.urban.org/urban-wire/understanding-differences-
between-covid-19-recession-and-great-recession-can-help-policymakers-implement-
successful-loss-mitigation
