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Economics/U.S. Fiscal Policy during the Great Recession

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Question
What major fiscal policy actions were taken during the Great Recession (2007-2009)? What impact did they have on U.S. economic performance?


I understand how how the recession occurred in the first place. I know that as far as fiscal policies, Bush passed the Economic Stimulus Act of 2008 and also the Emergency Economic Stabilization Act of 2008 which established the Troubled Assets Relief Program. Obama passed the American Recovery and Reinvestment Act in early 2009. I also am familiar with the objectives of each.

My question is on what their impact on U.S. economic performance was. The more reading & research I do, the more confused I'm getting. It of course seems all very political; Liberals interpreting data one way and Conservatives another. Some say it worked. Some say it failed. Some say it prevented a deeper economic recession or possibly even depression.
I'm leaning towards the latter. I'm not entirely sure. If you could just point me in a direction and towards some reliable data that won't make my head spin (meaning not too high level; this is for a college-level intro macroeconomics class).

My assignment is to write an executive summary making 3 positive statements/conclusions answering the question, backed by sufficient data/evidence/charts etc. in addition to 3 recommended actions to take regarding the economy based on the key conclusions.     

Thank you in advance for any help you can give me. I'm incredibly lost.

Answer
Dear Amy,

Thank you for asking me the question. Even though I am not supposed to help a student write her assignment, I am inclined to give you some guidance, especially because you have mentioned you are "incredibly lost." Here I give you some guidance:

First, recession of 2007-2009 is quite different from the Great Depression of 1929. This is mainly because these are two totally different sets of circumstances, based on two totally different sets of causes and two totally different sets of remedies, owing to two different economic conditions with different variables and parameters impinging on economic landscapes in two technological scenarios.

So what was necessary to combat depression in the 1930s couldn't do equally effectually in 2007-2009. In 1929, when the economy was reeling, deregulation --raising consumption through increase in income, increasing demand, and bringing investment multiplier to the fore -- did the job.The same remedy was the bane in 2007-2009.

Second, the recession of 2007-2009 was a modern malady caused by technological advancement and unbridled expectations of Americans. There was the internet bubble. This was a new phenomenon. People bought into this industry, and stock prices spiraled up sky high without the real value keeping pace. Then there was the housing bubble. Every American wanted to have a home, no matter where the money would come from. Mortgages and bank credits went berserk. Any Tom, Dick or Harry could now own a home. At the same time the burden of loans were weighing too heavily to which nobody gave a hoot.

Third, people were lured into buying stocks of "rapidly rising" companies that were declaring constantly increasing lucrative dividends in a utopia. People started becoming richer and richer day by day --but on papers. Everybody was rich by virtue of the stock certificates.

Fourth, people did not understand they were being deceived. There was Ponzi schemes [look up Google] and there were failures of large companies like Freddie Mac and Fannie Mae [look up Google] and there were accomplished frauds like Barnard Madoff [look up Google].

Fifth, economists were extremely ill informed. Great economists like Allen Greenspan or Harvard President Summars did not understand the situation. They thought the remedy should be something like that had occurred after the Great Depression. So they thought there should be more and more deregulation. That means all businesses were allowed to do business unfettered with any government control. [Of course a great woman, Borooksley Born,objected to this, but she was snubbed --see Google.]

Sixth, hence American business became totally uncontrolled. Corruption emerged, Ponzi schemes proliferated, false feeling of being wealthy pervaded American economic landscape.

Seventh, then came the credit crunch. There were series after series of foreclosures of mortgages. People wanted to sell their stocks, but nobody was buying. Stock prices plummeted. Millionaires became paupers overnight --gilt-edged stocks turned useless papers! People started losing homes, and with that the money they had spent. This was the financial meltdown.

The solution to all these ills lay in "regulation" which was not there. When regulation came, it came hurtling down on the people of the U.S. like a juggernaut, and they were in real bad shape.

The government, of course, did give give succor to the dying giant companies, which did not help the general masses. The pains were felt by the whole population.  

So, Amy, you are right: actions prevented deeper economic recession and even depression.

How do you attack the problem set out in your assignment? First, you must know that "positive statement" means a statement that can be proved or refuted --it need not be true. So "The Church of England said the sun moves round the earth," which is not true, is a positive statement. On the other hand, "Amy should eat hamburger," which can neither be proved nor disproved and is just judgmental, is a "normative statement." So write down 3 positive statements, such as "home prices went up," "stock prices fell rapidly," "people were buying homes," and so on. You get some data for 3/4 years. You get your answers.

Next you can show what measures were taken up, such as "control in making credits," "overseeing business operations," etc.

This, I hope, Amy, should get you off to a start. Best.

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Eklimur Raza

Expertise

It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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