EC103-Topic#4: Official Recession, Holidays, New Stimulus

There has been a great deal of commentary in the media about economics this semester, with good cause… I’ve brought together a few pieces from currently popular economics writers and thinkers to bring some context to the Keynesian economic theory that we’re currently discussing in class. Much of our course has revolved around how monetary policy is enacted and when it is effective, but it appears as though there is not much more room for the Fed to take effective corrective actions to stabilize the current economy. It appears as though Congress and the next President are ready to take more steps to stimulate the economy through additional fiscal action.

I would like everyone to read the articles and blogs below, and take note the variety of opinions these writers have on the economy. Given your basic economic understanding of the current recession, what action do you believe is warranted going forward? If you think fiscal action is warranted, what do you believe will be the result, and what will be the long-run consequences for YOU and others. Again, try to back up your opinions with facts (or at least estimated facts).

You can alternatively consider the articles that discuss the definition of a recession, since it was finally declared on 12/1. Many questions can be raised about the need and timing of an “official” start date to a recession. Think about whether or not you believe an “official” date is necessary, and if you think there would be any difference if the NBER did not call these precise dates. For some evidence that the dates do in fact matter, you can actually now bet on when you believe a recession has begun through a firm called Intrade. Examining Intrade’s graphs on the probability of a recession in 2008, shows that the economy was looking pretty rosy to many bettors back in September. So, aside from gambling, do you believe that it is necessary to know when exactly it is believed that our economy has gone through a recession.

For each of these, you need to find your own sources (there are many stories out there). You should NOT use some random blogger’s story or Wikipedia to support your opinion. Try to stick to reliable news sources and facts. Remember that for these assignments you need to put forth your opinion and back it up with facts.

What would Keynes have done? by Greg Mankiw

Fed Signals More Action WSJ.com Blog

Another Mankiw comment on Fiscal Policy

Krugman on Fiscal Policy and Keynes

Tyler Cowen on Keynes

NOW it’s a recession and the Official NBER annoucement

Yes, you can bet if it’s a recession or not

Does the Fed have more room for monetary policy?


<img src="http://data.intrade.com/graphing/closingChart.gif?contractId=508654&intradeChart=true&transBackground=true&transBackground=true" height="225" width="460"
alt=”Price for US Economy in Recession (*see contract rules for definition*) at intrade.com”
title=”Price for US Economy in Recession (*see contract rules for definition*) at intrade.com” border=”0″>

28 thoughts on “EC103-Topic#4: Official Recession, Holidays, New Stimulus”

  1. In Gregory Mankiw’s article, he writes that to save the United States economy, aggregate demand must be increased. Raising consumption, investment and net exports seem nearly impossible so the only feasible option appears to be to increase government spending. Unfortunately, this borrows from the future and may place a future economy at risk. However, the economy is in a situation with its back against the wall. There may be no other options but to increase government spending. One way of increasing government spending is in the form of public investment. Ideally, the outcome will be similar to FDR’s New Deal. More roads, public transportation will create new jobs and the country will be better off at the very least in the form of physical capital. With this increase in government spending, aggregate demand will rise followed by an increase in sales for businesses. More sales means more hired workers, which in turn should create greater output and greater profits. With a higher employment rate, the economy would produce at a higher output. Also, the increased income from employment could yield more investment as well as more lending. The increased incomes may also help pay off debt and reduce the credit crisis.-JR-Krugman, Paul. "Deficits and the Future." New York Times 12 01 2008 4 Dec 2008 (http://www.nytimes.com/2008/12/01/opinion/01krugman.html).-Mankiw, Gregory. "What Would Keynes Have Done?." The New York Times 11 28 2008 4 Dec 2008 (http://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5A).

  2. When looking at the “official” start date of a recession, the necessity of this declaration can be considered from at least three different points of view. First there is the “official” start date of a recession for the entire economy in comparison to the real recession that the individual person experiences. Although the start date was only just declared, in reality more and more Americans have been feeling the affects of a recession for a while now with gas prices, loss of jobs, and the housing crisis. Even the president of the NBER, James Poterba said that he thought the psychological consequences of the official declaration would be modest because economists have been warning of a recession for months (1). From this perspective, the “official” start date of a recession does not seem necessary because it only confirms what the majority of Americans have already been experiencing for the past year. Secondly, there is the “official” start date of a recession as a reported measure of a recession. In this respect, the start date is important and necessary to economists and historians because, while it may have no particular significance today, the data from a year ago can be compared to data from past recessions and used to learn more about how our economy works. Finally, there is the political element of the “official” start date of a recession. Now that a recession has officially been declared, the question becomes what will the government do to respond? In this sense, the “official” start date can be seen as both necessary and unnecessary. It becomes necessary in that it kick-starts the government to react. Because politicians want to be reelected and keep their jobs, they will have to do something to try to counteract the recession. Interestingly enough, the lame-duck White House did not use the word “recession” in their reaction to the declaration. But White House spokesman Tony Fratto did say, “What’s important is what is being done about it” showing this mindset where government officials recognize the significance of a response (2). But figuring out the “official” start date of a recession could actually be counterproductive if the government crafts excessive policies that make the situation even worse. “There is danger of overreaction,” says economist Rudolph Penner from the Urban Institute in Washington, D.C., “The bureau’s declarations do not make a good basis for policy decisions because they come after the fact. Even before Monday’s edict, policymakers had acted to lessen the impact of a recession that had been widely acknowledged by crafting bailouts and stimulus packages, and nothing in Monday’s announcement should change any plans” (2). So in the political sense, and in seeing how the economy will actually be pushed forward by politicians, an “official” declaration can have good or bad results: the government needs to be both wise and cautious in their actions in dealing with such an important matter for so many people.1. http://www.thecrimson.com/article.aspx?ref=5256532. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/02/MNTL14FCBU.DTL E. Kennedy

  3. In the wake of the recent declaration that the United States economy is in a recession, many potential solutions are being presented to fix the increasing issues. In my opinion, I believe that there are a number of things that the Fed can do involving monetary policy to slow the panic, as well as things Congress can do regarding fiscal policy to stabilize a collapsing economy. The first thing that Congress can do, as mentioned by Robert H. Frank in the New York Times, would be to begin President-Elect Obama’s tax plans that include increased taxation of the highest brackets. According to Frank, the current tax cuts under the Bush administration are not going to expire until 2010, and while Obama’s initial plan was to eliminate the cuts in January, but now the stance has changed to allow these expire at the end of 2010. However, I believe that there must be specific regulations regarding the increase in taxation so that the money specifically goes to fixing the economy and not other interests. These regulations would include paying for tax cuts for lower income families so that these Americans, the Americans who represent the majority of the population, would have more disposable income and could thus revitalize the economy by making purchases with their new money. Further, the money could be used in a way similar to how FDR used the New Deal to create jobs as it could be turned into money to fund internal construction or renovation of public utilities. As long as the money is put back into the economy, I believe that the people in the highest tax brackets would be willing to accept these higher taxes. While they would naturally be upset at an increase in their taxation which would result in their own loss in income, they would still profit more from the revitalization of the economy than they would lose through these tax cuts. During this recession, the Fed has acted to lower interest rates to get banks more motivated to make loans, and between the low interest rate and the infusion of capital that would be composed of this tax money, the economy could be revitalized. As we have learned each dollar spent in the economy would not only stimulate the economy for that dollar, but it has an additional value, that in this case would be generating $1.50 for each dollar spent. Another important facet would be an assurance from the Fed to continue keeping interest rates low and for the Fed to continue to buy up mortgage debt. By buying up this debt, the Fed gets money into the economy in exchange for goods, the debts, that no one else wants, and so the increase in disposable income combined with the low interest rates would allow lower and middle class families to take out loans for possibly creating new businesses, which would create even more jobs. Overall, like the AIG and other various bailouts, there is an opportunity here even amidst the crisis for the economy to recover, provided that the money the Fed and Congress either dole out through bailouts or receive through higher taxes is spent responsibly and intelligently.http://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5Ahttp://www.nytimes.com/2008/12/07/business/07view.html?ref=business

  4. John Maynard Keynes argued that there are situations in which monetary policy can do no more, and it seems as if this day has come (1). Controlling the money supply has been an efficient way to stabilize the economy, but now with the target federal funds rate at 1%, there isn’t much room for the Fed to work with further rate cuts (2). The U.S. could find itself in a liquidity trap, and President-elect Obama will likely undertake expansionary fiscal policy decisions that could lead to crowding out (2). A possible solution to this problem could be what Mark Bils of the University of Rochester and Pete Klenow of Standford have suggested, that we should cut the payroll tax to stimulate the economy (3). They suggest that by subsidizing the payroll tax out of general revenue for a sustained period of time, there could be some distinct advantages. In their words, “It targets domestic production better than sending out checks (or a sales tax cut).” This plan could effectively target and help lower income households. While not dealing directly with the unemployed, it does deal with reentry and job creation decisions. It seems that in the current economic situation, a deficit financed tax cut could be the best fiscal policy to stimulate the economy (4).(1) http://krugman.blogs.nytimes.com/2008/11/29/the-keynesian-moment/(2) http://econblog.aplia.com/2008/11/americas-looming-liquidity-trap.html(3) http://gregmankiw.blogspot.com/2008/12/bils-klenow-stimulus-plan.html(4) http://gregmankiw.blogspot.com/2008/12/fiscal-policy-puzzles.html

  5. According to the National Bureau of Economic Research, “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales [that] begins just after the economy reaches a peak of activity and ends as the economy reaches its trough” (NYT). The NBER announced on December 1, that the American economy was in a recession for the previous 12 months. It took exactly a year to figure out that there was a recession a whole year ago, which makes one wonder about determining the official starting date to a recession. Citizens of the United States have been feeling the effects for a while, due to high unemployment and increased prices. In addition to this scare, recent reports signaled that even after 11 months, more than the entire length of the last two downturns, this recession has only now entered its fiercest phase, and economists say the pain will not end soon” (Sorkin 1). Essentially, things will only get worse before they can get better. According to the NBER’s definition of recession, it seems impossible to determine an official start date because of inconsistencies in the definition. What determines significant change? Why did it take a year to determine the current recession, if the definition says it will only take a few months? The New York Times is accurate in its claim that “there is no official definition of recession, and no official body to decree that one has begun or ended. Indeed, a clear picture of the state of the economy usually comes months or even years later” (NYT). “Recession.” Recession- News- Times Topics- The New York Times. The New York Times. 8 Dec. 2008 http://topics.nytimes.com/top/reference/timestopics/subjects/r/recession_and_depression/index.html.Sorkin, Andrew R., ed. “In Strings of Bad News, Omens of a Long Recession.” The New York Times. 8 Dec. 2008. 8 Dec. 2008 http://www.nytimes.com.

  6. Barack Obama and his economic team are preparing an economic recovery plan to deal with the current situation. The plan will include massive investments in infrastructures, especially for roads, schools, and energy efficiency . Critics have argued that such plan will only mortgage our children’s future and increase people’s dependence on government. However, the new spending program proposed by President Obama must be regarded as a long-term investment. For example, modernizing federal buildings to make them more energy efficient will reduce the government’s energy bill and ultimately save taxpayers’ money. The government must intervene because the situation is exceptional; 533 000 jobs were lost last month, the worst month for employment in 30 years . The government is adopting the right option by favoring government investment over tax reductions. Indeed, cutting taxes would support consumption, while this situation requires the government to support employment. We must also remember that the prolonged period of low interest rates is partly responsible for this financial crisis. Obama, Barack. Your Weekly Address from the President-Elect: December 6, 2008. United States. Office of the President Elect.Uchitelle, Louis, Edmund L. Andrews, and Stephen Lebaton. “U.S. Loses 533,000 Jobs in Biggest Drop Since 1974.” The New York Times 5 Dec. 2008: 1-2.

  7. In Michael Enriquez article, Americas Looming Liquidity Trap, he writes the interest rate reductions brought the target fed funds rate down to 1%. The Federal Reserve therefore finds itself in the thorny situation of having only 100 basis points left to work with for possible target rate cuts. (1) This means the United States is very close to being in a liquidity trap and President elect-Obama is going to have to undertake fiscal policies while spurring private demand. President-elect Obama should follow the example of Japan and take into consideration the words of Paul Krugman.Paul Krugman wrote in his essay, Thinking About the Liquidity Trap, that there are two situations in which fiscal policy will succeed in serving as a solution to a liquidity trap. The first situation is if the liquidity trap is short lived; the fiscal policies act as a bridge to gap the recession. Second, in order for fiscal policy to succeed in the long run, a large increase in private demand must occur in order to create a self-sustaining process of recovery that can continue without further stimuli. (2) When President-elect Barrack Obama takes into consideration the need for fiscal policies in today’s economy, he must take in to thought whether the liquidity trapped faced by America is short term or long term. It is difficult to judge all external factors that go into judging the longevity of a recession and when Mr. Obama is faced with the decision for fiscal policies he must take every factor into consideration. Mr. Obama will also face challenges in raising the private demand so that the fiscal stimuli are no longer required to help the economy from growing. Although I believe Mr. Obama should implement expansionary fiscal policies in order to spur the economy, there are many things he will need to plan in order to eventually move towards a self-sustaining economy. There are also many consequences toward future generations with the addition of fiscal policies. In the end, in order for the United States to spur the growth of its economy there will need to be a conscious effort by everyone to increase consumption and investment. -Kendall H.(1)http://econblog.aplia.com/2008/11/americas-looming-liquidity-trap.html (2)http://web.mit.edu/krugman/www/trioshrt.html

  8. With the Federal Funds Rate at 1%, it seems that the Fed is running out of the usual “recession-fighting ammunition”(Fed Signals More Action as Slump Drags On). In order for the Fed to continue guiding the economy out of this recession, it must think of more creative ways in which to combat the recession, as said in Fed Signals More Action as Slump Drags On. It is important for the Fed to stimulate the economy through implementing longer-term interest rates as mentioned in the article “What Would Keynes Have Done?” so that it can instill confidence to its citizens to spend and borrow. The longer- term interest rates are a step in the right direction, but the government should provide incentives and job opportunities to help the economy move along and get people back to work before the economy gets worse. One investment that the government is currently enacting is $500 billion in mortgage-backed securities that have helped decrease mortgages rates. This “refinancing activity showed that there was an appetite that could be whetted by lower rates” as said in the article “A Rush Into Refinancing as Mortgage Rates Fall.” Through refinancing mortgage there can be an overall cash flow and reduce the risk of payment. This refinancing also provides comfort for individuals who can rest easy with lower mortgage rates with the downturn of the economy. It also helps more people to “qualify for loans because their monthly principal and interest payments will be lower (A Rush Into Refinancing as Mortgage Rates Fall).” Through investment like these and longer low interest rates the economy is heading in the direction slowly but progressively.Man Ting-http://www.nytimes.com/2008/12/04/business/04refi.html?_r=1&scp=1&sq=A%20Rush%20Into%20Refinancing%20as%20Mortgage%20Rates%20Fall&st=cse-Fed Signals More Action as Slump Drags On by Jon Hilsenrath-What Would Keynes Have Done? by N. GREGORY MANKIW

  9. According to Keynes, an economic recession occurs when the total demand for goods and services declines, which therefore causes businesses throughout the economy to decrease sales, cut back production and lay off workers. With a rising unemployment, profits and demand decrease. The NBER recently stated that the recession began in December of 2007. They gave no official causes but we can assume that the housing downturn was one major reason. Employers have cut payrolls by 1.2 millions jobs in the first ten months of this year and on the past Friday, economists are predicting the government will report a loss of another 325,000 jobs for November. With rising costs of living, rising unemployment, record foreclosures and depleted savings, actions need to be taken to help those that our suffering from the recession. It is not necessary to know exactly when it is believed that we are in a recession because it can persuade the thinking of our spending. If we know we are in a recession it is likely that we will save more when we should be spending more to increase GDP. In order to apply the Keynesian Theory to our current economic status we must increase aggregate demand through some event or policy and therefore our recession can be reversed. One solution to the current recession is an increased infrastructure spending with would follow the Keynesian theory, increasing demand, national income and stimulates spending by consumers and companies. However, increased government spending would add to the long-term debt that we are already facing and affect me and my family and the outcome of my future. The Federal Reserve can bolster aggregate demand by reducing interest rates, which would then encourage people to borrow and spend and increase consumption, investment and net exports. This would be an ideal solution because the Federal Reserve can keep interest rates low for a sustained period. They have also talked about purchasing treasury notes and bonds that would lower long term rate which would bring down mortgage costs and borrowing costs for businesses and individuals and therefore increase the productivity of our economy. We can also follow the paths of FDR by providing incentives and job opportunities to encourage people to enter the work force and prevent another Great Depression.-DOhttp://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5Ahttp://money.cnn.com/2008/12/01/news/economy/recession/index.htmhttp://online.wsj.com/article/SB122815304785769411.html

  10. So far, the Fed has worked to ease the financial crisis by lowering the interest rates. The goal of lowering interest rates is to encourage more people to spend money and increasing the money supply. The current interest rate set by the Fed is 1% and it can’t get much lower than that. I believe the next important step that needs to be taken is for the Fed to take measures to increase consumer spending. When people don’t spend money, production decreases, causing employment to decrease, which in turn causes an even greater reduction in spending. To fend off both unemployment and further financial downturn, consumer spending needs to increase. The government can encourage spending by giving tax cuts, or rebate checks which most people spend within the first 6 months of receiving it. Although it is almost as if people are borrowing from their future selves, we need spending right now and hopefully this money can be repaid in the future when conditions are better. I think it is important to declare the date of a recession. I think people and businesses need to know when financial times are not good so they can react and try to work to improve their situation. Dating a recession also helps people determine what factors contributed to the economic downturn and how these problems can be solved in the future. People already knew the economy was not at its best right now and the declaration of the recession only confirmed peoples’ fears. Now people can look forward to the light at the end of the tunnel of this recession and work towards getting out of the trough. -L. Phillipshttp://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htmhttp://www.sciam.com/article.cfm?id=fixing-financial-crisis&page=2http://www.marketwatch.com/news/story/declaring-recession-how-do-we/story.aspx?guid=%7B7B5BA061-228F-4EEC-9193-B812CDCDEBAF%7D

  11. Over the past year Americans have been worrying about if the US was in fact in a recession. Finally, last week the NBER made it official and announced that the United States has been in a recession since December 2007. Even though this was not a surprise to most American, it sent most of us in a furry deciding how we were going to further restrict our spending. Considering that the NBER took a year to determine that the US was in a recession, leaves me skeptical about whether or not it is truly necessary for the NBER to declare it at all. American are already stressed enough about the economy due to the constant attention it has been getting in the media (Carr). Rather than alerting American about how poorly the economy is doing and how they can save their money, the media should instead be informing viewers how they can help spur the economy. Additionally, the government has been taking steps to stimulate the economy long before December 1st so by the NBER announcing the recession only further increased the pressure on the government to increase its involvement. With America in an “official” recession, European and Asian stocks fell on Tuesday due to the fear of a global recession (Jolly,Wassener). Not only does the NBER’s decision affect the global economy but also as the Wall Street Journal explains there have been some discrepancies in the reports of GDP that the members have been debating over the past year. Over all it would be better fitted if the NBER focused their efforts on figuring out ways to improve the economy.http://www.nytimes.com/2008/12/08/business/economy/08econ.html?scp=7&sq=recession&st=csehttp://www.nytimes.com/2008/12/08/business/media/08carr.html?scp=10&sq=recession&st=csehttp://blogs.wsj.com/economics/2008/12/01/recession-dating-when-in-doubt-wait-for-a-crisis/Lili Carrier

  12. In our current depression economists look to the ideas of Keynes in attempt to fix the deteriorating economy. Keynes stressed a fiscal stimulus to move the country out of depression. This policy needs to be implemented now. Manikew sites some interesting ideas of various affects of different Keynes policies. He presents these ideas as results of an empirical study as if the results are factual. I hesitate to simply accept these results because I am curious how successful a study like this could be. A reoccurring fear of economists is that the Fed can’t really do that much anymore. The interest rate is extremely low and their policies don’t seem to have a strong enough effect on the economy. Bruce Bartlett of Forbes.com believes the fed can only do so much and at some point government spending needs to take place. He looks at the problem of Velocity and its effect on the economy. This low velocity that is occurring is leading to the deflation that is destroying our economy. Stimulus packages from the government will not help because that money is borrowed so it doesn’t actually increase the money circulating in the economy. According to Keynes theory the government needs to purchase tangible products in order to fight the collapsing economy. Once these purchases are complete the policies of the Fed can have a stronger effect. The challenge of the Obama administration is to implement policies that will draw out a substantial amount of resources from the economy as quick as possible. http://www.forbes.com/opinions/2008/12/04/depression-deflation-velocity-oped-cx_bb_1205bartlett.htmlhttp://gregmankiw.blogspot.com/2008/12/fiscal-policy-puzzles.html

  13. Fiscal policy is surely the way to correct the current economic situation. Though it will require a short wait until January, since there is thankfully not enough time left in the Bush administration for him to attempt to fix the economy, the Obama plan of regulation, tax cuts and spending cuts is the best solution to the crisis. His plan calls for immediate tax cuts of up to $500 per working individual and $1000 per family. Such immediate action, along with a regime change in the White House and increased regulation of certain embattled industries, is sure to boost consumer confidence in the economy. Indeed, Obama’s change in fiscal policy is predicted to give the average family an additional $3,631 in disposable income in the next few years, and as much as $5,620 by 2018 (Heritage). Other Obama measures which will give the economy a boost, outside of fiscal policy, are tax-deductable college tuitions and mortgage tax cuts. In fact it is not just the change in fiscal policy which will spell economy recovery, but the change in public policy as well.http://www.heritage.org/research/taxes/cda08-09.cfmhttp://www.barackobama.com/issues/economy/

  14. Gary Hager, president of Integrated Wealth Management in New Jersey, said, “Inflation is the 8,000-pound gorilla in the room.” Inflation is a word that tends to scare a lot of Americans. And those people are the ones who can only define it as having to pay more money for a sandwich. Inflation can be a good thing, in moderation. As of right we seem to be in the middle of a coin toss, heads: inflation, and tails: deflation. If it lands on heads, even if the FED and the Treasury can stabilize the economy, there could be a brutal inflationary spike. (1) Meaning that long-term interest rates would go through the roof and the value of the dollar would dive. On the other hand, inflation isn’t our biggest problem, now it could be deflation. The lack of aggregate demand, as Keynes would agree, will cause prices to fall and the need for an increase in real interest rates. And the government isn’t going to stop this by just printing out more money. Lena Komileva, an English economist, says U.S. and European governments have embarked on “a super-expansionary policy” in which government purchases will support private-sector demand. (2) But she believes this isn’t enough, since credit is so readily unavailable, demand for goods have plummeted. And now the companies responding to week demand week consumer demand are cutting jobs, further weakening the labor market and leading to a decline in consumer spending. Inflation or deflation, either way my future seems pretty dismal. I really am not sure what will happen to me if the government starts to purchase treasury notes to lower long-term interest rates, because I might be in a foreign country living out of a tent. If that’s not the case, then the weak job market will definitely rattle my cage. All I can really hope for is Obama’s fireside chats. (1)http://money.cnn.com/2008/12/07/news/economy/bailout.question.fortune/index.htm?postversion=2008120812(2) http://money.cnn.com/2008/11/06/news/deflation.fortune/index.htm

  15. It seems like most people are arguing that the government should be taking some sort of action, whether it is monetary policy, fiscal policy, or both. But this argument ignores that good-intentioned and similar government policies are what got us into this mess in the first place. Peter Schiff explains that the Federal Reserve’s actions of lowering interest rates to one percent following the September 11th attack, and keeping them below the rate of inflation for the coming years “discouraged savings and practically distributed free money.” (1) This policy made homes more expensive than they were actually worth, but at the same time the low interest rates encouraged more people to buy these homes that they could not afford. The recession that we face today is the market trying to deflate this housing and credit bubble that the government had a large hand in creating. The monetary and economic policies that have been implemented and that many are proposing to implement, will only work to re-inflate the bubble. Others are arguing that without these steps, banks would not be giving out the loans that are necessary to get people spending again. But our country has a huge debt-burden already; we don’t need to add to that. These actions may make our economy function better in the short-run, but in the long-run our problems will only be worse. “By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.” (1)(1) http://www.washingtonpost.com/wp-dyn/content/article/2008/10/15/AR2008101503166.html(2) http://www.safehaven.com/article-12016.htm

  16. According to Keynes, an economic recession occurs when the total demand for goods and services declines, which therefore causes businesses throughout the economy to decrease sales, cut back production and lay off workers. With a rising unemployment, profits and demand decrease. The NBER recently stated that the recession began in December of 2007. They gave no official causes but we can assume that the housing downturn was one major reason. Employers have cut payrolls by 1.2 millions jobs in the first ten months of this year and on the past Friday, economists are predicting the government will report a loss of another 325,000 jobs for November. With rising costs of living, rising unemployment, record foreclosures and depleted savings, actions need to be taken to help those that our suffering from the recession. It is not necessary to know exactly when it is believed that we are in a recession because it can persuade the thinking of our spending. If we know we are in a recession it is likely that we will save more when we should be spending more to increase GDP. In order to apply the Keynesian Theory to our current economic status we must increase aggregate demand through some event or policy and therefore our recession can be reversed. One solution to the current recession is an increased infrastructure spending with would follow the Keynesian theory, increasing demand, national income and stimulates spending by consumers and companies. However, increased government spending would add to the long-term debt that we are already facing and affect me and my family and the outcome of my future. The Federal Reserve can bolster aggregate demand by reducing interest rates, which would then encourage people to borrow and spend and increase consumption, investment and net exports. This would be an ideal solution because the Federal Reserve can keep interest rates low for a sustained period. They have also talked about purchasing treasury notes and bonds that would lower long term rate which would bring down mortgage costs and borrowing costs for businesses and individuals and therefore increase the productivity of our economy. We can also follow the paths of FDR by providing incentives and job opportunities to encourage people to enter the work force and prevent another Great Depression.-DO http://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5Ahttp://money.cnn.com/2008/12/01/news/economy/recession/index.htmhttp://online.wsj.com/article/SB122815304785769411.html

  17. Fiscal policy, as opposed to monetary policy since interest rates are already at an all-time low, is used usually in times of recession especially when referencing Keynesian economics. Increased government spending and consumption is encouraged in order to stimulate the economy and lower the unemployment rate. Keynes attributed recessions towards inadequate aggregate demand. The decline in goods and services causes sales to decline, businesses to fail, and workers to get laid off, increasing the unemployment rate. In order to solve this decline, an increase in at least one of the factors of aggregate demand—consumption, investment, government spending, and net exports—must occur. Many families fear spending money now, especially with such things as the housing crisis, since there is so much economic uncertainty. Also with the housing market, investment in housing is unable to increase and business investment won’t be able to make up the difference that residential investment is unable to make. Net exports have risen due to a decrease in price of American goods abroad and an increase in price of foreign goods here. However, it is neither substantial enough nor sturdy enough to depend on. Thus, we must turn to an increase in government spending in order to try to “fix” the recession. This is exactly what President-elect Obama has in mind. He said he “plans the largest U.S. public works spending program since the creation of the interstate highway system a half-century ago.” By doing this, he is putting money back into the public while also supplying thousands and thousands of jobs, which would help to decrease the unemployment rate. Some of the ideas he has in mind are repairing roads, creating green jobs, and expanding broadband accessibility. I agree with Obama’s plan to increase government spending and provide more jobs to workers. However, since it is difficult to determine the appropriate amount of money to allocate to such projects and since it takes a significant amount of time to see a change, problems could occur. More money could be spent than should be, which would cause an inflationary spike. The Fed may also, in an effort to quickly solve the recessionary issues, make more money. This too would lend itself to an inflation, which would have many issues for my generation. Ultimately what I am concerned with is the national debt and the fact that increasing government spending, like what Obama plans on doing, will only increase the $700 billion debt that we are already in. This won’t affect our parent’s generation, but rather my generation and it will be left up to us to fix it.-Becca Kolinshttp://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=2&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5Ahttp://www.google.com/hostednews/ap/article/ALeqM5h8MclXuudzXHdOqAGixMmlyFRwBgD94V5M900http://www.csmonitor.com/2008/1209/p09s01-coop.html

  18. The National Bureau of Economic Research finally confirmed what analysts had been harping on for months: the U.S. economy is officially in a recession. While the evidence has been mounting, especially since the Lehman Brothers and Merrill Lynch collapses in September, the announcement of the specific date of downturn had an obvious effect on the stock market, with the Dow down 680 points following the announcement. Setting a specific beginning for the negative growth, even after a full twelve months, seems to have solidified the economic crises – rising unemployment, the credit crunch – for Americans. Part of the conclusion of recession comes from the adjustment of GDP figures, which were lowered after initial speculation. I believe the official declaration of a recession causes unnecessary panic given the signs existed previously, but this might be what the country needs in order to radically alter fiscal policy.Sources:http://www.nytimes.com/2008/12/02/business/economy/02econ.html?_r=1http://blogs.wsj.com/economics/2008/12/01/recession-dating-when-in-doubt-wait-for-a-crisis/

  19. Why declare recessionBy Miranda Cooper As the article recession dating stated “Then a major international crisis hits, economic data start looking uglier and the recession question is effectively settled.” At the point when they declared recession there was no doubt there was one in affect. The reason for stating there is a recession is mainly two fold. One it is obvious they don’t declare recession till after it’s abundantly clear the country is in one. As the website intrade.com (a website for the public to wager on numerous different categories) shows people for a long time were aware of the economic downturn. To not declare it is nothing more than delusional. The second reason I believe they declared it was recession, was to make the problem abundantly clear. People will always try to deny the truth when it doesn’t sit well with them, this declaration at least stops what few naysayers were left.

  20. At present, due to decreasing demand, sales and production are decreasing. This could (and probably will) lead to rising unemployment. Unemployment naturally means less people have money to spend, and the rising prices mean that more people will spend less. This will lead to lower demand, and thus the loop continues. Friedrich Von Hayek said in his book the Denationalization of Money (page 102) that "the past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process." Therefore with the current economy in mind, I find myself increasingly appreciative of Hayek's point of view. Perhaps it would be in our best interest to simply allow the market to "solve itself". Of course, that can only happen in theory. As Greg Mankiw says in his article "What Would Keynes Have Done?" the instability of the economy is mainly due to insufficient aggregate demand. Keynsian theory suggests that the best way to deal with this would be to implement a plausible fiscal policy: that is either the government should increase government spending, thus attempting to stimulate spending in the economy (which is the President elect, Obama's plan), or the government can make tax cuts. But as Mankiw points out, there are definite drawbacks to adopting these measures. The first flaw lies in the fact that while increased government spending will fix the problem in the short run, in the long run it will lead to a budget deficit. The second flaw is that because "baby boomers are retiring and are claiming Social Security and Medicare benefits," tax cuts will result in the government having less money to spend and therefore this excess spending would lead to a higher national debt. So if the fiscal policy doesn't work, perhaps the monetary policy will, right? Again, as Mankiw points out, that is not always the case. The Fed can "bolster aggregate demand by lowering interest rates" or they can "encourage international capital to look elsewhere and thus cause the value of the US dollar to drop in the foreign exchange markets", leading to a increase in consumption, investment and net exports. However, the problem lies here: the Fed has already tried all this, and recently have even resorted to buying mortgages. While this may be helping the economy stabilize somewhat at present, it is not a long term solution.I feel that the best bet would be implementing both a fiscal and a monetary policy. As I stated before, contrastingly attractive and improbable as Hayek's idea of allowing the market to right itself seems, perhaps it can with slight aid of a mix of both the fiscal and monetary policies. By a mix I mean that the Fed should not only set a long term interest rate, but maintain that low interest rate for a sustained period of time, while the government should implement a tax cut. This would result in people increasing their spending, because low interest rates would making saving seem like a less attractive option, while the tax cuts would allow people to have more disposable income to spend. As a result demand would increase and thus sales and production would increase and unemployment would decrease. The eternal loop would right itself, for the present.- Wellings, Richard. "Monetary policy a cause of depressions". "Institute of Economic Affairs (IEA) Blog" and "Economic Theory". October 16, 2008.(http://blog.iea.org.uk/?cat=3)- Mankiw, N. Gregory. "What Would Keynes Have Done?" The New York Times. November 28, 2008.(http://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5A)

  21. The current recession leaves our government and most importantly, our president elect with some serious decisions to make. Without some kind of government intervention, the current recession will easily turn into a depression. So, the question becomes- what now? I think one of the best ways to combat this recession is to increase government spending. For the first time since the 1950's, the government has an opportunity to make major improvements on infrastructure. President elect, Barak Obama's improvement plan includes increasing government spending to improve schools, high speed railways, highways and other infrastructure in the U.S. This plan is in sync with Keynesian theory that says when times are hard; the government should “spend into the wind”. Massive spending on these new projects will increase job opportunities for Americans and spur the AD- something the economy is in desperate need of. Some economists critical of infrastructure projects would rather see the government give cash bonuses to tax payers in hopes of spurring consumption. This kind of solution however, is not extreme enough to combat the recession that the U.S. is facing. Losing more than a half a million jobs in November alone, the U.S. is in need of some new job opportunities and a $300 government check is not the way to spur massive economic activity. The Fed's usual remedy for economic trouble has been the lowering of the short-term interest rate. Right now however, short -term interest rates are already at 1%. According to Ben Bernanke, another way to spur in business and consumer demand would be to lower long -term interest rates in hopes that once the economy stabilizes, interest rates can return to the norm. The mass spending in infrastructure proposed by Obama is actually a great opportunity for the U.S. The plan includes creating more "green jobs" and public transportation to reduce the carbon footprint of the country. Public buildings will be updated to be more energy efficient and schools will be improved greatly through the addition of technology and resources. Although costly to the government now, these improvements will spur short term AD and are beneficial for the modernization of the U.S. By investing in technology and schools, the long-term debt can hopefully be handled by a nation of well educated, cost efficient people. The debt posed in the infrastructure plan is quite daunting however. It could leave $700 billion… to be paid back by future tax -payers… like us. By increasing taxes on the upper tax brackets (those who can presumably afford a tax raise) however, some of the debt can be tackled right away.Although the prospect of 700$ billion debt is a scary thing, government spending will create new jobs and even new job industries that will benefit the nation in long run as well as the short run. Critics say that the benefits of these programs may not prove effective for 3-5 years. For the immediate remedy, cuts in the long- term interest rates may help the economy. In staying true to Keynesian theory, if we don't address the short run problems, we'll all be dead in the long run. It's better to be alive and in debt, right?http://seattletimes.nwsource.com/html/opinion/2008483910_opin09peirce.htmlhttp://www.forbes.com/markets/2008/12/09/oecd-us-economy-markets-econ-cx_je_1209markets21.htmlhttp://www.usnews.com/articles/news/politics/2008/12/09/to-jolt-economy-obama-and-congress-eye-billions-in-infrastructure-spending.html?PageNr=2http://www.politico.com/news/stories/1208/16258.htmlhttp://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=2&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5Ahttp://www.aneveu.com/ec103/Fed%20Signals%20More%20Action.pdf

  22. The general public has been debating whether we are in a recession, which suggests a sign of low morale in the economy and strongly supports, the idea that a recession may indeed be in effect. Earlier in the year, many people have begun to feel the consequences of a recession, seeing grocery prices rise, gas prices soar, production decrease, and unemployment increase (1). While it is important to acknowledge how the economy is faring, it is not necessary to be so bent on exactly when the recession started. However, it is essential to know whether we are facing a recession in the present state because announcing it officially can spur actions that can lead to both negative and positive impacts. It has been suggested that perhaps the NBER knew for a while that a recession was going on but since that announcing it only confirms the belief of many and causes panic they chose not to disclose the fact (1). I am surprised the NBER finally announced that we are officially in a recession and have been so for the past year. I suppose it is understandable that the NBER did know about it earlier on but was hesitant to declare it. Perhaps they wished to avoid using that term and hoped the market would improve? It was necessary that consumers maintain a high spirit for consumption during the holiday season. It was recently reported that the holiday shopping garnered an increase in sales and profits. It was stated in an article “Sales on Friday, traditionally the busiest shopping day of the year, were 4% higher than last year” (2). There may be hope of recovery. However, announcing an official recession and its estimated start date may have positive effects: it places pressure on the government to respond quickly to alleviate issues. With the official announcement, Bush encourages congress to pass a 100 billion economic stimulus package (2). Why should we wait for the NBER to tell us when the recession started? The real issue is can we get out of this recession? It is within our best interests to channel our energy in correcting economic matters and improving future conditions because immediately obtaining an exact date the recession started is difficult and does not offer much insight. 1. http://economix.blogs.nytimes.com/2008/10/08/recession/2. http://www.telegraph.co.uk/finance/economics/2743548/US-brains-declare-recession-official.html-AWU

  23. The article Current Recession Could Break Records introduces the official announcement of the recent state of economic recession on Dec. 1st as, “The current downturn is far from over. Manufacturing activity fell to its lowest level in 26 years in November, consumer spending has been declining and Shela Bair, chairwoman of the Federal Deposit Insurance Corp., warned last month that 4.5 million people could lose homes to foreclosure”. I think that even though people knew that the U.S. economy was or could potentially be in a recession, an official date is significant because it impacts the behavior and the decisions of the general public and of consumers. There has been a dramatic and sudden drop of production and share markets. The article Can Obama Stop the Current Recession? further explains, “The “financial sector” can only collapse if the production structure (sometimes called the capital structure) has been so disarranged by a central bank’s monetary policy that it can no longer sustain the capital values that share prices represent”. Hence, fiscal action is warranted to go forward because although the bailout has solved to a certain extent the liquidity issue of commercial and private banks’ unwillingness to lend to one another, the Fed’s monetary policy has not yet solved the bigger problems of the economic downturn such as the increasing number of home foreclosures. In addition, the upcoming Obama administration plans to increase government spending in order to stimulate spending by both consumers and companies. The current recession requires new courses of technological and industrial development that would lower the cost of manufacturing and will eventually increase output and employment. As a result, there should be an increase in aggregate demand of American goods and services in the national and international market. The stimulus package is another plan that might help to increase consumption. This monetary incentive would also increase the national income and make people believe they now hold more wealth; however eventually people would have to pay back this benefit by facing higher taxes in the future. Other long-term effects and/or consequences of an implementation of fiscal policy as the New York Times article What Would Keynes Have Done? suggests is that the future generation would have to deal with the burden of a possible national debt caused by the prevailing budget deficit if government spending increases. ))Karie A.”Around the Street: Yes, It’s a Recession.” Business Week 01 Dec. 2008.”Can Obama Stop the Current Recession?” Seeking Alpha. 02 Dec. 2008. 09 Dec. 2008. http://www.seekingalpha.com“Current Recession Could Break Records.” UPI.com: A Hundred Years of Jornalistic Excellence. 02 Dec. 2008. 09 Dec. 2008 http://www.upi.com/.Mankiw, N. Gregory. “What Would Keynes Have Done?” New York Times 30 Nov. 2008.

  24. In my opinion, recession dating is an unnecessary action that the National Bureau of Economic Research, or NBER, announces every once a while. Recession happens when the economy contracts, and in definition, recession starts when there are two straight quarters of declining economic output. The economists in the NBER will not announce recession if we are currently in a recession. They will only officially declare a recession until they gather all the necessary data, which will most likely be a year after the actual recession starts. Announcing a recession a year after it starts does not do anything to help the current situation. Te country will still suffer from recession regardless whether NBER announces recession or not. Moreover, most people can feel if the country is in recession. Whenever there are high unemployment, falling companies, and decreasing spending will signal people that a recession is emerging. Furthermore, NBER revises GDP constantly. A growth two years ago may become a decline two years later. So it is unnecessary to announce to the public that a boom two years ago is now revised to a decline two years later. Finally, declaring a recession has a negative impact on the stock market. As the most recent recession is declared, stock market plunged 9%. Billions of dollars evaporated after the announcement. If recession dating only causes negative impact on our life, why do we still need it?http://blogs.wsj.com/economics/2008/12/01/recession-dating-when-in-doubt-wait-for-a-crisis/http://www.nytimes.com/2008/12/02/business/02markets.html?_r=2&hp

  25. J. AlintoffOne effort that may be undertaken in terms of monetary policy is a decrease in interest rates that will empower consumers by increasing their disposable income. However, as previously stated, with interest rates at a practically minimal low of 1%, “short-term interest rates – [have] already been pulled about as far as it can go,” and this monetary policy effort has proven to be lacking (Hilsenrath and Reddy). An increase in government spending that Obama has proposed through his infrastructure plan may be one fiscal policy that could be employed to combat the recession. “However, our already massive national debt and the likelihood of waste involved in government spending” defy the potential benefits that may be derived from this method of increasing aggregate demand (Enriquez). A third effort at increasing aggregate demand is to decrease taxes. This fiscal policy will increase disposable income, and will potentially help to stimulate the economy. According to Mankiw, “a surprise deficit-financed tax cut is the best fiscal policy to stimulate the economy.” With an increase in disposable income, more people will spend money, thus resulting in an increase in aggregate demand. The results of an increase in demand include an increase in demand for labor, thus lowering unemployment. This will in turn have a positive affect on the dollar, and then result in a better profit from international trade. If tax cuts are affective, the economy will improve in the short term, and remain better in the long run as well because an increase in aggregate demand, with no change in monetary policy, and thus no change in inflation, will result in an increase in output. This will lead to excellent economic conditions for those entering the work force because consumers, with more disposable income, will increase the need for labor in the supply side of the market. However, according to Hilsenrath and Reddy, Obama plans to increase government spending in an effort to increase aggregate demand. Obama must suppose that an increase in government spending will create jobs and stimulate the economy thusly. One can only hope. Fed Signals More Action as Slump Drags On Recession Began a Year Ago, Making It Longest Since Early ’80s, Panel Says; Bernanke Considers Rate Cuts, Bond Purchases By JON HILSENRATH and SUDEEP REDDY http://www.aneveu.com/ec103/Fed%20Signals%20More%20Action.pdfAmerica's Looming Liquidity Trapby Michael Enriquezhttp://econblog.aplia.com/2008/11/americas-looming-liquidity-trap.htmlGREG MANKIW’S BLOGRandom Observations for Students of Economicshttp://gregmankiw.blogspot.com/2008/12/fiscal-policy-puzzles.html

  26. There is not much more the Fed can do using monetary policy to stabilize our current economic crisis. This recession is unique and multifaceted, and calls for multiple defenses. The federal funds rate has been cut to 1% with hopes of stimulating consumption and investment. Yet, when consumer confidence is at such a record low it is doubtful that the population will react appropriately, even during the holiday season. The severity of the situation is what is standing in the way of these policies taking proper effect. The volatile housing market, high unemployment rate, low consumer confidence, large government budget deficit, climbing value of the dollar and aging population create a highly complex problem that even Keynes cannot solve.If the Fed has already done what it can with monetary policy then where will Keynes guide us in fiscal policy? Keynesian theory says government spending multipliers are larger than tax multipliers, however Mankiw reports on an econometric study that suggests the opposite. The study: What are the Effects of Fiscal Policy Shocks? concluded deficit financed tax cuts are the best way to stimulate the economy. If the fed chooses Keynes then the deficit increases. If they choose tax cuts the outcome is the same. I do not want my generation to inherit the largest budget deficit on the planet. And those who opt for instant rescue, like Dean Baker, need to understand policies aren’t working like they are supposed to, predictions have become a shot in the dark. The Fed needs to get creative and it needs to be better than buying mortgage debt, and spreading rumors about a rising inflation rate. It has come time to look past theory and act realistically; not only for now but also for the future. M GuajardoWhat Would Keynes Have Done?-Greg Mankiwhttp://gregmankiw.blogspot.com/2008/12/fiscal-policy-puzzles.htmlhttp://www.nber.org/papers/w14551

  27. There is no denying that the incoming administration will have an almost impossible task with regard to the economy, and while everyone is asking “What should be done?” very few seem to be asking “Should anything be done at all?” Clearly the actions taken so far by the Fed are having little affect, and soon they will be unable to lower the limbo bar anymore. In macroeconomics however it is always difficult, if not impossible, to understand exactly what is going on at the current moment. It has taken nearly a year to find out we are in a recession, so does it not make sense that it will take time to find out we are out of one, or if the actions taken have worked? The combination of fear from the Fed and the intentions of the new administration lead me to believe that they will overreact, causing economic damage in the long run. The wall street journal blog admits that some of the Fed’s current actions would be quite inflationary during “normal times” and while the markets certainly seem unpredictable, the basic tenets of inflation remain and in time these actions may be seen as highly damaging. The incoming administration has also made it clear they will increase government spending to boost the economy, but Mankiw points out that this has discouraged the private sector. After all, if the government is going to invest in industries, why would a private company want to compete with them? The government has the ability to make the rules, and usually whoever makes the rules, wins the game. This increase in government spending will actually be unfavorable to the private sector at a time when it needs help the most. True, the private sector has not stepped up yet as everyone is still running scared, but if the government instead of deficit spending put as much emphasis as possible on encouraging private investment and maintaining stability the private sector will eventually respond. During recessions labor is cheap and there is still money to be made, and where there is money to be made people will make it.What would Keynes have done? by Greg Mankiwhttp://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&sq=mankiw&st=cse&adxnnl=1&scp=1&adxnnlx=1228241317-fgh4UqDFIFrpWLnkG2tx5AFed Signals More Action WSJ.com Bloghttp://gregmankiw.blogspot.com/2008/12/fiscal-policy-puzzles.html-Ralph P.

  28. A lot of people are beginning to consider today’s economic situation another Great Depression. Similar to the Great Depression there is rising unemployment, failed banks and panicked markets. Economists, however, are often too afraid to describe a buisness slump as a “depression because the word is too terrifying. David Wyss, chief economist for Standard and Poors, states, “We are a long way from the D-word” based on the most recently recorded data in June. Apparently in June, the gross domestic product for the United States was continuing to grow at a rate of 2.8%, and it fell in the third quarter at an annual 0.3%. In September it was recorded that the unemployment rate was 6.1%. Wyss believes, “It’s a recession,” but some believe it is not even considered a recession because, even for the shorthand version of a recession, where there are two consecutive quarters of shrinking gross domestic product, it has not even happened yet.(This information was found at the following site: http://www.usatoday.com/money/economy/2008-11-03-economy-depression-recession_N.htm)

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