1 Junris

Recession In The United States Essay

The Great Recession Essay

Personal Finance Term Paper:

The Great Recession

Starting in the middle of the year of 2007, there was a bursting of the 8 trillion dollar housing bubble in the United States that lead this country to The Great Recession. This recession officially lasted from December 2007 to June 2009 and resulted in the loss of wealth due to the sharp cutbacks in consumer spending that resulted in a great loss of consumption, that was combined with the financial market catastrophe that started because of the bursting of the housing bubble that brought its country to a collapse in business investment. The consequences as a result of this loss in consumer spending and business investment were dreadful since the unemployment rate greatly increased. Just in 2008 and 2009 alone the U.S. labor market lost an average of 8.4 million jobs. This was the worst recession that the United States has faced since the Great Depression. ("The Great Recession",stateofworkingamerica.org)

The United States government needed to do something to help save its economy and help pull its country back out of recession since the consequences that this recession had on the United States were devastating and affected a countless amount of people. That is the reason why the 111th United States Congress in the month of February in the year 2009 passed the American Recovery and Reinvestment Act of 2009 that was signed into law by President Barack Obama on the date of February 17, 2009. ("American Recovery and Reinvestment Act of 2009", Wikipedia.org)

The American Recovery and Reinvestment Act of 2009 was also commonly known as the Stimulus package or the Recovery Act of 2009. The reason why the USA passed the American Recovery and Reinvestment Act was for the main reason to save and create as many jobs as they possibly can for the citizens of its country as fast as they can. ("American Recovery and Reinvestment Act of 2009", Wikipedia.org) The United States was trying to find a long term and effective solution to help out its country's deficit and its people that were in a time of great need now more than ever before since the time of the Great Depression and the solution to the recession would be to pass this Act.

What the American Recovery and Reinvestment Act did is truly help out Americans to get back on their feet and back to the lifestyle that they used to live, during the time when their economy was prosperous unlike what their economy was during the years of 2007, 2008 and 2009. The Act performed this task by providing temporary relief programs for the people that were most effected by the recession. But other than this the Act also did many other things to help stimulate its country economy like investing in infrastructure, education, health and also including renewable energy. ("American...

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When the economic shocks that cause recessions in different economies have large common components, there may be lessons to be learned by studying how different economies respond.

The effects of the Great Recession of 2008-09 have been wreaking havoc on the U.S. economy for nearly five years. Many authors have used the depth of the recession and the sluggish recovery to compare the recent recession to previous recessions, including the Great Depression. For instance, Glenn Hubbard, chairman of the Council of Economic Advisers from 2001 to 2003, recently compared the current recovery to the recoveries from the 1973 and 1981 recessions.1 Why is this the right comparison?

Certainly we cannot expect the shocks that hit an economy to always have the same economic outcomes. Even if the causes of the Great Depression were the same as those of the Great Recession, the economy of the 1930s is not the economy of today, so we should not expect it to respond in the same manner.

When the economic shocks that cause recessions in different economies have large common components, there may be lessons to be learned by studying how different economies respond. This essay looks at six major economies in Europe—France, Germany, Italy, the Netherlands, Spain, and the United Kingdom—and compares them with the United States on two key economic variables: gross domestic product (GDP) and unemployment. Since aggregate demand has been used as the basis for the policy responses in the United States and Europe, this essay also compares the paths of consumption and investment.

Figure 1 shows GDP in the United States and the major European economies. Several findings are apparent. First, the size of the contraction was much steeper in Europe: GDP in Germany, the United Kingdom, and Italy fell more than GDP in the United States. Second, the recovery in the United States has been steady, similar to the recovery in Germany. The other European economies are still below their 2008 peaks.

Unemployment has been the persistent problem with the U.S. recovery.2 The table shows that the U.S. unemployment rate was initially lower than the unemployment rate in most European countries. While the U.S. unemployment rate has been falling from its high of 9.7 percent in January 2010, the unemployment rate in European countries (except Germany) has been on an upward trend since 2008.

Many policy responses to the Great Recession and the associated U.S. employment problems have been based on the notion that the slow recovery is due to insufficient demand. For instance, Federal Reserve Chairman Ben Bernanke stated on March 26, 2012, that “while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor.”3 According to the Federal Open Market Committee minutes for the June 2012 meeting, “structural factors were contributing to unemployment, but…slack remained high and weak aggregate demand was the major reason that the unemployment rate was still elevated.”4

Figure 2 suggests that the case for insufficient aggregate demand needs to be interpreted with caution. Consumption expenditures and gross capital formation (i.e., investment) together account for almost 85 percent of GDP. When we compare the time series of consumption plus investment in panel A, both the United States and Germany are above their peaks. Private consumption expenditures in both countries are more than 3 percent above their January 2008 peaks (see panel B).

Compared with most of Europe, the German and U.S. economies seem to be recovering. Of course, policy responses have differed across countries. However, given the common shocks, it seems likely that the differences in various countries’ ability to respond to the shocks are structural.

Notes

1 See Segal (2012) and Cooley and Rupert (2012a) for further analysis assessing recessions and recoveries.

2 While the current unemployment rate is high relative to previous recoveries, Cooley and Rupert (2012b) suggest that “this may be as good as it gets.”

3 See Bernanke (2012).

4 See Federal Open Market Committee (2012).

References

Bernanke, Ben S. “Recent Developments in the Labor Market.” Speech at the National Association for Business Economics Annual Conference, Washington, DC, March 26, 2012; www.federalreserve.gov/newsevents/speech/bernanke2....

Cooley, Thomas and Rupert, Peter. “How Bad Is This Recession and How Should We Assess the Recovery?” U.S. Economic Snapshot, February 3, 2012a; http://econsnapshot.com/2012/02/03/snapshot-fourth....

Cooley, Thomas and Rupert, Peter. “This Economy Could Be as Good as It Gets.” The Great Debate (blog), Reuters, September 10, 2012b; http://blogs.reuters.com/great-debate/2012/09/10/t....

Federal Open Market Committee. Minutes of the Federal Open Market Committee, June 19-20, 2012; www.federalreserve.gov/monetarypolicy/fomcminutes2....

Segal, David. “Romney’s Go-To Economist.” New York Times, October 13, 2012; www.nytimes.com/2012/10/14/business/glenn-hubbard-....




Thomas F. Cooley, B. Ravikumar, and Peter Rupert, "Bouncing Back from the Great Recession: The United States Versus Europe," Economic Synopses, No. 32, 2012.

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