Federal Reserve Bank of San Francisco monetary policy introduction 2004

Fiscal and Monetary Policy

How is a recession defined? Is the U.S. currently in a recession? Explain.

The National Bureau of Economic Research (NBER) "is widely recognized as the arbiter of starting and ending dates of U.S. recessions" (Burtless, G. April 19, 2010). As such, NBER indicates, "recessions start at the peak of a business cycle and end at the trough; and are 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" (National Bureau of Economic Research. 2011). The last U.S. recession, coined the "Great Recession," ended "in June 2009, 18 months after the economy began sliding into a downturn in December 2007" (Murray, S. September 21, 2010) according to NBER.

While "more than eight in 10 Americans think the economy is in another recession, according to a new CNN/ORC poll" (Levy, A. September 2, 2011); there has been no widespread decline in economic activity sufficient for NBER to declare a new recession. Further, a more common financial press definition of recession has not occurred; "the economy hasn't experienced two straight quarters of negative growth" (Levy, A. September 2, 2011).

Assume you are an advisor to President Obama. What fiscal policy tools could be used to stimulate the economy? Be sure to review Obama's 2011 Budget Proposal (NY Times). Are there any specific areas that you would change?

"Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes" (Mankiw, G.N. 2004). Reviewing the 2011 Obama Budget of 3.69 trillion (The New York Times. February 1, 2010), an immediate consideration regarding the outlays is that mandatory spending: Social Security, Medicare, Interest on Debt; 64% of the total proposed budget, is effectively off limits to changes. The remaining discretionary spending of 1.415 trillion is available as a fiscal tool (The Washington Post.com. 2010). Certainly, the President could propose additional spending measures such as his American Jobs Act released in September 2011.

Concomitant to discretionary spending is the revenue collected by the Federal Government in taxes, 2.57 trillion in the 2011 Obama budget (The Washington Post.com. 2010). One of the prominent fiscal tools the President has utilized is deficit spending, 1.27 trillion in the proposed budget to stimulate the economy (The Washington Post.com. 2010). Government spending reflects a belief in the multiplier demonstrated by "additional shifts in aggregate demand when expansionary fiscal policy increases income and thereby increases consumer spending" (Mankiw, G.N. 2004). There is debate over the size of the multiplier; Keynesians contend it is greater than one, while supply- side economists believe the coefficient is significantly less than one. While this debate is important, the reality is that Congress and the President will not agree on further government spending to stimulate the economy, given the deficit and the explosion of debt past 15 trillion dollars.