The Great Recession of 2008 and The Obama Administration's Failure

I wrote this for a macroeconomics class. It was fun and depressing at the same time. 

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When economic growth decreases or is stagnant for more than two consecutive quarters, it is referred to as a recession. Unemployment increases, and production and real income decreases. The United States’ gross domestic product (GDP) is often used as the measurement of growth—or lack thereof.  Recessions occur naturally throughout time, and the U.S. government attempts to combat them with fiscal and monetary policies. However, the outcome of the government's actions is not predictable.  This all holds true for the Great Recession of 2008. Though cyclical, there were factors and decisions made which exacerbated the recession and hindered recovery.

            A housing bubble was said to have formed in the late 1990’s and especially in 2005 to 2008. Housing was in high demand due to low interest rates and few stipulations to obtain loans. Due to irresponsible lending practices, and the impending economic downturn, the housing credit bubble burst in 2008. This was a major exacerbation of the 2008 cyclical recession.  In order to supposedly fight the recession, the Obama administration enacted an expansionary fiscal policy instead of a non-interventionist policy. That is, they took a “stimulation” approach, and increased deficit spending through the Economic Stimulus Act of 2009. Though the Bush administration technically added on extra spending for fiscal year 2009 (it rose from $458 billion in 2008 to $1.16 trillion in 2009) the succeeding administration’s deficit for 2010 was $1.546 trillion, and they continued over $1 trillion deficits until fiscal year 2013. The administration funded programs like Cash for Clunkers, (failed) green energy projects, infrastructure, and extended unemployment benefits. These programs gave temporary relief to a few Americans. However, though in the short run this leads to an increase in real GDP, it also leads to the crowding out effect. That is, when government is spending and investing in large amounts, it effectively “crowds out” private investment. Thus, it is a short-term "benefit" and not a solution. Any long-term growth that could have resulted from private sector growth has been hindered.

            The Obama administration put into effect an inflationary monetary policy. That is, it increased the Federal Reserve’s monetary supply by buying treasure bonds and notes, then used them to keep interest rates low, so as to attempt to stimulate purchases in the economy. These increases in demand lead to an increase in market prices, and of course irresponsible lending practices all over again. In addition, the administration printed more money in order to pay off some of the country’s debts (debt monetization). This also leads to inflation, and devaluing the U.S. dollar. The Chairwoman of the Board of Governors of the Federal Reserve System, Janet Yellen, explained that the board uses the Phillips Curve as a guide on inflation, even though it is not considered reliable.  The Philips Curve shows the relationship between inflation and unemployment, though it does not take into account all other factors, and can only be used as a guide in the short-run.

            Overall, the expansionary fiscal and monetary policies of the Obama administration have not proven to be successful to help build long-term growth after the onset of the Great Recession of 2008. The redistribution policies of the U.S. government have only served as short-run safety nets for few Americans, and have not yielded enough substantial private-sector growth to come back fully from the Great Recession. If anything, redistribution policies have kept growth at bay and extended the recession. Deficit spending has further exacerbated the economic woes by crowding out private investment, thus obstructing, rather than aiding the private sector’s development. Though the unemployment rate has dropped over the last few years, the Congressional Budget Office and the Bureau of Labor Statistics have noted that the unemployment rate used in headlines does not take into account the labor participation rate, or the growing number of people relying on part-time work. The labor participation rate has been lower than usual--that is, Americans are not actively looking for work, or have given up. The reliance on part-time work continues to be a trend. The worker underutilization rate, (called the U-6, which counts part time workers, as well as workers who are able but not looking for work) has declined, but ever so slowly since its peak in 2009. 

        It's time to admit that expansionary fiscal and redistribution policies not only fail to combat economic downturns, but they stand in the way of any long-term solutions.