A Fiscal Interpretation of the Economic Recession of the 21st Century

A Fiscal Interpretation of the Economic Recession of the 21st Century

Valerie Martinelli

Post University

As of 2011, our current economic standing as a nation was best be described as a recession. A recession is explained as a decrease in the GDP over two consecutive quarters, or six months. Economies that experience a slowing down of the rate of economic growth are said to be in a recession (Heyne, Boettke, and Prychitko, 2010). A recession occurs when the number and depth of disappointments increase without any compensating increase in the quantity and quality of pleasant surprises (Heyne et al., 2010). Some may ask why the United is currently in a recession and responses can include political complexities, capitalism, lack of leadership, or too much government interference in business. My beliefs tend to reflect a combination of those factors.

The recession of the 21st Century is one that was predicted by some. In the fall of 2008, which was a little more than a year after the Bank for International Settlements (a Switzerland-based organization that fosters cooperation between central banks) warned that years of loose monetary policy fueled a giant credit bubble, thereby leaving us vulnerable to another 1930s slump. A volatile mixture of free market fundamentalism, corporate-dominated globalization, stagnant wages, growing inequality, greed, excessive leverage, and financial innovations, such as securitization finally exploded (Levinson, 2009).

Recessions are the result of the accumulation of inaccuracies, the consequence of the variety of errors among participants within the economy (Heyne, et al., 2010). Price signals are misread and not corrected. They instead lead to bad investments. What was expected to be profitable was not. Entrepreneurs and small business owners must change their plans, cut production, lay off employees, and equipment and/ or inventories may have to be liquidated. “Those who have lost jobs, homes, and dreams will never look at things the same way again. Like the generation that survived the Great Depression, these people will forever reflect new attitudes towards money, investments, risk, and their own financial security” (Moeller, 2010, p 22).

A point worth discussing is capitalism. Capitalism can be explained as an economic system based on a free market, open competition, profit motive, and private business ownership as a means of production. Within this current recession capitalism has begun to dwindle as the general public no longer has the confidence or the finances to invest, which is encouraged by capitalism. Nor do they have the confidence to open a business or spend money frivolously. The government must take an aggressive role in the economy in pivotal ways. Rather than passively handing out subsidies to privileged private interests, energies in Washington should be devoted to producing things that private capital will not pursue. Public Citizen President Robert Weissman argues that Washington must support the production of public goods. Even if it is only to nudge the private sector and flex its muscle in times of crisis, demanding obligations in exchange for bailouts, and inspiring innovative experiments to serve the public interest (Greider, 2011).

Another concept to be examined is the unemployment rate, which is at an all-time high. Job loss has many effects in many different ways. The first and most obvious is the effect on the economy and our economic stability. If money is not being earned it cannot be spent to be put back into the economy to create some stability. When earnings and wages are low and the cost of goods is so high people will not spend money as casually as they may have otherwise. Job loss also has effects in other ways. Job loss can have devastating effects on employees’ health and familial life. A year subsequent to job loss, men with high levels of seniority experience mortality rates that are 50% to 100% higher than expected. In addition, elevated mortality rates are still evident 20 years after job loss. Children of unemployed parents suffer income loss.

They not only have a tough time finding jobs when the unemployment rate is high in their local labor market, but also earn considerably less than their peers elsewhere once they have entered the market. Earnings gaps persist even 10 years after these children have left school (Greenstone, Looney, 2011).  The crime rate also increases, as do the rates of depression, drinking, homelessness, and illnesses. The loss of a long-held job will not just result in temporary unemployment as it also oftentimes leads to permanent income loss because employees earn a decreased level of wages upon reentry to the workforce (Greenstone, Looney, 2011).

Monetary policy is largely ineffective during a recession. Banks analyze potential borrowers more adamantly before approving loans or renewing current ones. Borrowers will be less eager to apply loans because the prospects for any short-term profits are unfavorable. A more efficient way to increase financial confidence when uncertainty lingers is for the government to continue to borrow and spend (Heyne et al., 2010). Timing is vital if aggregate demand management would be a productive tool in stabilizing the economy. The strongest argument for federal involvement is research that conveys that economic adjustment takes longer and is harsher than previously established. In many troubled communities, the post-recession rate of economic growth remains below that of the rest of the nation for decades. This suggests that there are substantial barriers to recovery and that overcoming them requires extensive assistance (Greenstone, Looney, 2011).  There are four justifications for the federal government to step in and aid a hard hit community. The first is its ability to promote an economy based on variety, the second is to avoid any distorted points, the third is to promote obtainment of new skills and/or education, and lastly, to minimize any further adjustment costs.

The United States is a nation of hope and hard work. This recession gives the American people and the government a goal of transformation we can work towards. Once we have the appropriate policies and solutions in place our economy will begin to function and grow once again. Jobs can be added and growth will be possible. Financial confidence will also begin to grow; people will spend and invest their hard-earned dollars an economic recovery is possible.

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