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.
