Introduction
Ever since the “Great Recession” of 2008, the U.S. economy has struggled to correct itself and get back on the track of its previous growth success. Initially, the problem revolved around lending and borrowing. Since financial institutions had been so lax in their previous lending activities, they were hit hard by the housing bubble bursting and they were reluctant to be quick to lend again. Without financial institutions to lend them money, consumers could not spend at previous levels, and since approximately 70 percent of gross domestic product comes from consumer spending, the economy was very slow to recover.
Even when financial institutions began to loosen their grip on money and increase their lending, there was a second problem that still hampered growth. This problem was the high level of unemployment. During the months of the recession, unemployment reached as high as 10 percent as businesses laid off employees in the face of rapidly falling demand. Anyone might have looked at past cyclical behavior of the economy and seen that unemployment quickly followed economic improvement, and the unemployment rate did not stay high for very long. However, this cycle turned out to be different. Businesses were very reluctant to rehire employees, so people stayed out of work longer. When people do not work, they do not spend, which causes the economy to move slowly toward recovery. In 2016, eight years after the recession hit, the economy is finally emerging from its long stagnant pattern as lending continues to increase and more people go back to work. Still, there are a significant number of workers who dropped out of the employment process and are no longer looking for work.
The Economy’s Uncertain Future
As alluded to above, the past cyclical nature of the economy with its growth spurts and recession dips had usually reacted in a predictable manner when coming out of a recession. Economists could look at the recession and feel rather confident about how long it would take and how the recovery would progress. However, this recession was different; it did not follow the normal pattern of recovery and was much slower in gaining traction to improve. Actually, there had been a few signs of this in the previous two economic downturns, but not to the extent of this recession. The behavior of the economy during this cycle added support to Keynes’ rejection of the classical position that the economy would naturally move toward full employment without any intervention by the government. Business owners were reluctant to rehire laid-off workers or to hire new employees when the business could grow and prosper by using current employees. Why increase the risk of having to let workers go again; if you do not hire them, then you do not have to lay them off.
The future is likely to resemble the present with respect to economic cycles and business’s reaction to them. When a recession or depression occurs, it will bring rising unemployment, declining investment, falling incomes and a slowdown in economic activity (“What is fiscal,” 2015). This spiral will tend to reinforce itself until some action is taken to reverse the economic downturn. Unfortunately, the recovery will look a lot like the recovery from the 2008 recession. Instead of a speedy recovery with increased borrowing that helps put people back to work, the cycle is very likely to be slow and stubborn with respect to unemployment. Business leaders will continue to be slow in hiring people and increasing their expenditures in the throes of a recession. They will not be quick to make decisions concerning the future of their businesses. In fact, many of them will watch what happens to other businesses before making any moves in their own business.
Regardless of what businesses do, there are only a couple of responses that can be made to a change in the business cycle. The position of classical economists that the economy will take care of itself does not seem to work all that well any longer, if it ever worked as well as these economists thought. Keynes and economists who thought as he did argued that government intervention was necessary if the economy was to get back to a favorable place in the business cycle. The economy would not correct itself and it would not approach full employment without some help. These economists were in favor of using fiscal policy to bring the economy back to a cycle of growth (“What is fiscal,” 2015). Fiscal policy favors government intervention, even if the government has to employ the workers itself. In fact, this was the way the U.S. fought its way back from the “Great Depression”.
There are other economists, even though they do not wear the classical label, who believe that the worst thing that can happen is for government to interfere in the economy (Brooks, 2012). Paul Samuelson, and other economists at the University of Chicago, favor monetary policy rather than fiscal policy. Monetary policy regulates the flow of money in the economy and leaves the decisions about how to implement monetary policy in the hands of a central bank or another independent agency. The idea is to keep economic decisions independent of the government and in the hands of those who can best stimulate the economy to grow and put people back to work.
The impact of globalization on the individual country economies has moved some of the effect of either fiscal or monetary policy out of the country’s hands. The U.S., or some other country, may formulate a fiscal policy to help improve the economic cycle, but the effect of that policy on the U.S. economy is also related to how other countries respond to the U.S.’s economic problems. If these countries decide they can bypass the U.S. economy, then the fiscal policy will not have much of an impact on straightening out the economy. Future economic cycles will not respond as quickly to fiscal or monetary policy attempts to improve them.
- Brooks, C. (2012). What is Monetary Policy? Business News Daily, Nov. 26. Retrieved from:
http://www.businessnewsdaily.com/3474-monetary-policy.html - What Is Fiscal Policy? (2015). Economic Concepts.com. Retrieved from:
http://www.economicsconcepts.com/What_is_fiscal_policy.htm
