State of the Economy

State of the Economy

The great recession in the U.S. was a severe financial crisis combined with a deep recession. The latest official recession lasted from December 2007 till June the year 2009. And it took the United States several years to recuperate and improve to pre-crisis levels of employment and output (Grusky). The slow reclamation was due in part to the households and financial institutions paying off arrears accrued in the year before the crisis and further the reserved government expenditure following the initial stimulus efforts.

Furthermore, according to the statistics by the department of labor, approximately nine million jobs equivalent to seven percent were shed from February 2008 to February 2010 with the real GDP contracted by 4.2% between the fourth quarters of the year 2007 and the second quarter of the year 2009. Therefore this is the reason the great recession is considered to be the worst economic slump since the great depression (Grusky). Moreover, the GDP trough was realized in the second quarter of the year 2009. Therefore this technically marked the end of the recession. Nevertheless, the real GDP did not regain its pre-crisis peak level until the third quarter of the year 2011.

When it comes to unemployment, it rose from 4.7% in November 2007 to reach its peak at 10% in October 2009. Happily, unemployment steadily returned to 4.7% in May in the year 2016. Furthermore, the total number of jobs did not return to the November 2007 level until May 2014 (Grusky). The households and non-profit organizations added approximately eight trillion dollars in debt during the 200-2008 period and then reduced their debt level from the peak in the third quarter of 2012. However, the debt accrued by the public rose from 35% GDP in the year 2007 to 77% GDP by the year 2016, this is due to the massive expenditure by the government while the private sector brought down the debt load accrued during the pre-recession period.

Therefore in the great recession, a quota of the fiscal policy reaction ensued automatically within the pre-existing programs. These programs are majorly termed as automatic stabilizers since they offer instant response during a recession without needing action from the congress. Therefore automatic stabilizers such as unemployment insurance (U.I.), the supplemented nutrition assistance program (SNAP), and Medicaid are specifically essential. Hence as soon as the great recession arrived, the participation in the automatic stabilizer programs began to expand as income fell, and the unemployment rose.

Therefore with unemployment and poverty confounding, unemployment insurance, and temporary assistance for needy families (TANF) reacted in various means. The U.I. rose in response to the increasing number of the newly unemployed, cushioning qualified workers against receiving losses. However, the caseload of TANF was a bit difficult to eradicate poverty as the levels grew.

The participation increased because of the habitually reduced eligibility prerequisites for participants. Additional funds were spent by the government and taxes condensed or reduced, therefore automatically delivered a fiscal inducement and response. The automatic stabilizers for the Unites States during the great recession amounting to about 2% points of GDP. However, the fiscal policies that need congressional actions may take a while because a considerable period is taken to observe that a recession has commenced, debating on the appropriate legislative responses, passing of the legislations, disbursing funds to states and people, and finally spending funds authorized funds.

Furthermore, the monetary policymakers were also quick to respond to the great recession in the United States as the Federal Reserve reduced the federal funds rate. These federal funds portend the interest rates that the banks charge each other for the specific loans taken overnight. This conventional monetary policy action aimed at lowering the borrowing costs for individuals and organizations. Therefore this enhanced both immediate consumption and investment.

There were an array of benefits and challenges of the fiscal policies such as reduced taxes by the government, which is enacted by congress. The benefits were that there was increased demand that further enabled a rise in the output and rapidly returning the economy to the pre-recession situation. Moreover, the advantage of using the monetary policy responded to the recession in the labor market by using open market operations that majorly involves the purchase and selling of securities to lower the rate of the federal fund (Grusky). Thus when the federal fund rate is lowered, it is advantageous since the interest rate is also reduced in the economy. This further encourages businesses to make investments, and therefore more employment opportunities are created. This, in turn, also heartens consumers to spend more, and thus consequently reduces the rate of unemployment.

However, the states are restricted by the law to run budget deficits in the case where the tax revenue fall, thus the need for a rainy day fund.  The States used an estimated $20 billion in tax increases or reductions to services. Hence, many states will tussle to allot funds to their rainy-day funds after the recession, and thus it is a massive threat in case another recession begins.

The current state of the economy in the United States is experiencing a downturn because of the sudden outbreak of the Covid-19 virus. However, before the outbreak of the deadly coronavirus, the economy of the United States was doing reasonably well. Unfortunately, the 2020 GDP fell from 1.8 % to 1.3%; however, with measures such as social distancing, the economic activities in the United States are set to reduce (McCormack 15). However, the congress passed a bill, and it was signed by the president, providing the federal agencies with $8.3 billion to combat the covid-19 pandemic. Moreover, the House of Representatives also passed a bill to temporarily extend the family and sick leave for many of the citizens. Thus the joint committee on taxation has done estimates that this will reduce corporate taxes by almost $90 billion in the financial year 2020 and $15 billion in the financial year 2021 before the end of the program.

As for employment, it is shown that there is an 8 million decline by the end of 2020. Further, the fed would raise short term rates to the 2.5% or 3% level; this is above the targeted 2% inflation. Therefore it is projected that credit will be difficult to acquire, and even the cost of capital is set to get higher. Hence with the combination of supply-side limits, weak demand, and financial crisis, the economy is thrown into a recession because of the coronavirus pandemic that has not only affected the economy of the United States but the entire world economies as well.