Page 9 - ISQ UK_October 2021
P. 9


           In a recession, the loss of jobs and income leads to reduced   the economy has already recovered. Ideally, added spending should
           spending, which leads to further job losses, and further reduc-  be pulled back as private-sector demand recovers.
           tions in spending, and so on. Fiscal stimulus is intended to halt
           this snowballing and can be thought of as a bridge supporting   The 2008 financial crisis and the pandemic both led to significant
           aggregate demand while the private sector recovers. That bridge   economic downturns, but they were different than typical reces-
           should be long enough to get to the other side. Stimulus was mas-  sions and very different from each other. Following the financial
           sive following the 2008 financial crisis—the U.S. federal budget deficit   crisis, it would take a long time to repair the damage to house-
           rose to 10% of GDP. In hindsight, while it prevented a much more   hold and business balance sheets. We tend to focus on federal
           substantial downturn, it wasn’t large enough to propel the economy   fiscal policy, but state policy played a key role in dampening the
           to a full recovery right away. From the start, the Biden administration   recovery. Most states have balanced  budget  requirements  and
           did not want to make the same mistake.               state budgets turning red in the aftermath of the financial crisis
                                                                led to spending cuts. About a third of the $831 billion American
           In every recession, U.S. lawmakers announce some sort of tax rebate.   Recovery and Reinvestment Act of 2009 was aid to states, which
           Economists caution that sending one-time checks to individuals isn’t   limited job cuts initially, though state and local government
           effective as these checks are more likely to be used to pay down debt   employment still fell sharply and did not fully recovery until 2019.
           or add to savings, and are less likely to be spent. However, as we saw   State tax revenues appeared to be at risk in the early stages of the
           during the pandemic, income support can provide a critical lifeline   pandemic, but federal support helped the national economy to
           for people who have lost jobs and income, and can prevent more   recover, and most states saw a quick rebound in revenues. The
           substantial economic weakening.
                                                                pandemic recession was the sharpest and briefest on record, but
           Increased government spending is also used to fight recessions. Such   brought massive job losses. The recovery has been swift, but par-
           stimulus should be targeted, timely, and temporary. Large-scale
           spending is difficult to plan quickly and, as we saw in the aftermath
           of the 2008 crisis, there may not be shovel-ready projects. Getting the
           money out rapidly is important. You don’t want to add stimulus after

                                           Fiscal and Monetary Policy

                                   Fiscal Policy                            Monetary Policy
                           The use of tax and spending policy to    The setting of short-term interest rates or buying
                             influence economic behaviour           of assets to influence economic activity

                            • Implemented by the government          • Implemented by the Federal Reserve
                                   to fight recessions                      to guide the economy

                            • Can take time to implement but         • Is quick to implement but may take
                                  effects are felt quickly               time for the impact to be felt

                                    GOVERNMENT                               CENTRAL BANK

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