Running head: DEFICIT SPENDING

The Choices of the United States

Edna Fenollal
American Public University System
27 July 2014
ECON102
Prof. Beach

DEFICIT SPENDING

The Choices of the United States

The United States government is responsible for protecting its people. Unfortunately,
sometimes that protection is from economic woes. A large number of fiscal and monetary
policies can help to alleviate problems resulting from recessive economic trends. In the case of
the late housing bubble, the resulting financial crisis, and Great Recession, the United States
used a range of different policies to bring the country back to healthy growth.
Fiscal Policy and Monetary Policy
Fiscal policy is application of government spending and savings in relation to the
economy. Often driven by needs originating from an expanding or contracting economy, fiscal
policy focuses on presenting possible government solutions. For instance, a contracting
economy can be alleviated with increased government spending and decreased taxation, both
solutions which help return solvency to individuals who are suffering from the contraction.
Likewise, an inflationary gap in the economy may need a contractionary fiscal policy to rein in
the price level increases. This could take the form of decreased spending and increased taxation
(Schmidt, 2012).
Monetary policy is the application of financial decisions at a macroeconomical level from
the standpoint of a central banking system. The American Fed uses three main monetary policies
in order to help recover from economic woes. These include setting the reserve requirements of
other banks for their loans, using a discount window to provide banks a means of accessing loans
for themselves, and performing open-market operations to includes the buying and selling of
government bonds (Schmidt, 2012).
The Great Recession

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While the Great Recession was perhaps triggered by a long list of compounded policies
both national and corporate, much of the solution would have to be on the shoulders of the
government to keep it from becoming bleaker than what will be remembered. A key point to
remember is that there are multiple timeline gaps between the initial throes of every recession
and its eventual upswing back to a growing economy. This was no different, in that recognition
lag would occur as the recession was discovered followed by inevitable implementation lag for
any of the solutions proposed. The country may still be within the timeframe of the impact lag,
as the changes that have been made run their course.
The first fiscal policy was the Economic Stimulus Act in 2008. As is common in a
recessive economy, the moves were towards expansionary policies, where the government
sacrifices income, in this case took on more federal debt, in order to tax the public less.
Although this came in the form of a retroactive rebate, it still amounted to a tax decrease and was
expected to provide much needed income for struggling families. There were additional business
tax incentives to reduce the burden on corporations (Romer & Romer, 2013).
The following year, the American Recovery and Reinvestment Act was a much larger
total cost effort in policy. This combined multiple fiscal policies into one package, including tax
rebates, tax decreases, aid to lower levels of government, financial support for the unemployed,
and a large increase in government spending on infrastructure (Romer & Romer, 2013).
Some smaller fiscal incentives have been created since the start of the so-called Great
Recession. Fewer expansionary policies were enacted after 2010, which is likely a response to
the increased pressure to reduce spending at the federal level, particularly with political problems

DEFICIT SPENDING

related to the federal deficit. However, unemployment insurance saw lengths extended at the
state levels, financed by the federal leve (Romer & Romer, 2013)l.
Most of the recent policies have been purely contractionary. These have served two
purposes, the first of which is predictive. The economy was clearly recovering from the
recession, but if the policies remained unchanged back to pre-recession levels, it could lead to
large amounts of inflation. By cutting back before this happens, the government would hope to
prevent the different forms of lag that are normally involved with fiscal policies (Romer &
Romer, 2013).
A second reason is likely due to one of perception. Making the change sends a signal of
confidence to the private sector. If the government is confident that the recession is over, then
the people will also be confident in this shift. A confident populace is more likely to spend and
get the gears of the economy moving forward. Perception of a good economy can lead to a good
economy. Most of these contractions involve undoing previous tax breaks, but also tax increases
related to funding the Affordable Care Act (Rittenberg & Tregarthan, 2014).
The monetary policy used in the United States may have contributed the greatest towards
averting another depression. Probably the most noticeable, and a difficult one to label as either
fiscal or monetary policy, is the Troubled Asset Relief Program (TARP). Meant initially to be a
means of dealing with the allegedly toxic assets of banks, TARP pushed capital into the banks
when they did not have it (Baumeister & Benati, 2010). It was essentially an absolutely free
discount rate, a loan from the government at no interest rate. Over 99% of the entire expenditure
has been repaid according to the U.S. Department of Treasury (2014).
Conclusion

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While fiscal and monetary policy may seem like flimsy solutions, no entity spends as
much in the United States as the federal government. Being able to direct funds in such a large
manner and to control the relative incomes of every citizen can have a huge impact on recession
consequences. While the recovery period may have seemed long to those who lived within it,
the Great Recession may have been far worse without the policies enacted at the national level.
The entire recovery may not yet be complete, but evidence of growth is quite clear, and will
hopefully be unaffected by a fresh economic disaster any time soon.

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References
Baumeister, C. & Benati, L. (2010). Unconventional Monetary Policy and the Great
Recession. Retrieved from
https://www.ecb.europa.eu/events/conferences/shared/pdf/wgem/Session1_Baumeister_P
aper.pdf??55bf4ace7ff79a06e02a56b8fe6c3f38
Rittenberg, L. & Tregarthan, T. (2014). Principles of Macroeconomics. Saylor Foundation.
Retrieved from http://www.saylor.org/site/textbooks/Principles%20of
%20Macroeconomics.pdf
Romer, C. & Romer, D. (2013). Fiscal Policy in the Great Recession. University of
California Berkeley. Retrieved from
http://eml.berkeley.edu/~webfac/cromer/e134_sp13/Lecture%2015%20Slides
%20Long.pdf
Schmidt, M. (2012). A Look At Fiscal And Monetary Policy. Investopedia. Retrieved from
http://www.investopedia.com/articles/economics/12/fiscal-or-monetary-policy.asp
U.S. Department of Treasury. (2014). TARP Tracker from October 2008 to date. Retrieved
from http://www.treasury.gov/initiatives/financial-stability/reports/Pages/TARPTracker.aspx