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Fiscal
When the government changes its spending or tax rates to help the economy. The main goals are to keep the economy stable, encourage growth, or control inflation
Stagflation
A mix of stagnant economic growth and high inflation, hit the U.S. in the 1970s. This unique crisis challenged traditional economic theories, as both inflation and unemployment were high—a situation not addressed by Keynesian economics
The reagan years usage of monetarism
o President Ronald Reagan implemented supply-side policies, reducing taxes, cutting regulations, and decreasing social spending to encourage investment.
o Impact: Reagan’s tax cuts spurred certain sectors, but they also led to large federal deficits. During his tenure, the U.S. shifted from the largest global creditor to the largest debtor, with a rise in speculative investments and increased economic volatility, culminating in the 1987 stock market crash.
Suuply-side economics
Emerging in the late 1970s, this theory argued that lowering taxes and reducing regulation would increase production, reduce inflation, and boost growth.
Monetary
when the central bank (like the U.S. Federal Reserve) changes the amount of money in the economy or adjusts interest rates. The main goals are to keep the economy stable, control inflation (preventing prices from rising too fast), and help people find jobs
Fiscal Historical Role
In times of economic downturns, governments often increase spending or cut taxes to stimulate demand (expansionary fiscal policy).
During periods of inflation, governments may reduce spending or increase taxes (contractionary fiscal policy).
Examples:
The New Deal in the 1930s: Large-scale public works projects to combat the Great Depression.
COVID-19 Pandemic: Stimulus packages, direct financial support, and unemployment benefits to stabilize the economy.
The New Deal - background & main concepts
Background: The Great Depression: By 1933, the U.S. faced unprecedented economic collapse:
Unemployment reached 25%.
Widespread poverty and homelessness.
Bank failures wiped out savings.
Decline in industrial output and agricultural prices
Main concepts:
Relief: Immediate aid for the unemployed and those in poverty.
Recovery: Stimulating economic growth to pull the nation out of the Depression.
Reform: Instituting long-term measures to stabilize the economy and prevent future downturns.
How was Fiscal policy connected to the new deal
Government Spending: Programs like WPA and PWA created jobs and boosted the economy by building things like roads and schools.
Counter-Cyclical Spending: The government spent more money during the Great Depression to make up for less private spending and investment.
Taxes: Higher taxes on the wealthy helped pay for programs and spread wealth more fairly.
Legacy: The New Deal showed that spending and taxes can fight unemployment and keep the economy stable, influencing modern policies like Keynesian economics.
Covid-19 connected to fiscal
Massive Fiscal Stimulus
The U.S. government deployed approximately $3 trillion in fiscal stimulus across various programs:
Direct Aid: To individuals, small businesses, and local governments to ensure liquidity and maintain economic activity.
Programs like the Paycheck Protection Program (PPP) provided forgivable loans to businesses to retain employees and avoid closures.
Enhanced unemployment benefits offered additional weekly payments and extended eligibility for those laid off.
Direct payments to individuals maintained consumer demand, preventing a collapse in spending.
Industry Support: Assistance for severely impacted sectors, such as airlines and hospitality.
The Amerian Rescue plan
Enacted to sustain recovery efforts, this plan expanded:
Direct payments to individuals and families.
Support for schools to reopen safely.
Assistance to small businesses struggling with pandemic-related challenges.
Healthcare funding to enhance vaccination and treatment efforts.
Monetary policy historical role
Central banks, like the Federal Reserve, adjust interest rates and use tools like open market operations to stabilize inflation and unemployment.
They also act as lenders of last resort during banking crises.
Examples:
Stagflation 1970 and 1980
The 2008 Financial Crisis: Quantitative easing (QE) and near-zero interest rates to restore liquidity and confidence.
Recent Actions: Interest rate hikes to combat inflation post-pandemic.
What triggered the great recession
Massive Consumer Debt: People borrowed a lot, and when they couldn’t pay back their debts, it hit the banks hard.
Stagnating Wages: As wages weren’t keeping up with costs, people relied on borrowing to maintain their standard of living.
Collapse of the Housing Market: Home values plummeted, meaning people’s investments and collateral fell in value. Banks lost their security and started collapsing too.
Complex Financial Instruments (CDOs):
To spread risk, banks bundled these subprime mortgages into Collateralized Debt Obligations (CDOs), which were sold to investors worldwide.
These CDOs were rated AAA (very safe) by rating agencies, despite being high-risk investments tied to unstable mortgages.
When homeowners defaulted, these CDOs lost value, leading to losses for banks and investors globally.
How did the government step in to fix the wall street crash
Government Bailout:
The U.S. government stepped in with a $700 billion bailout package (the Troubled Asset Relief Program, or TARP) to rescue failing banks and prevent the financial system from collapsing.
This bailout sparked public outcry, as many felt the government prioritized big banks over ordinary people, particularly those who lost homes.
"Too Big to Fail":
The crisis highlighted the idea that some financial institutions were so large and interconnected that their failure could destabilize the entire economy. The government deemed it necessary to bail out these institutions to protect the broader financial system.
Keynasian Economics
Introduced by John Maynard Keynes during the Great Depression, this theory emphasizes the importance of government intervention to manage economic cycles.
Core ideas of keynasian economics
Governments should spend more during recessions to boost demand.
Focuses on short-term economic stabilization rather than relying solely on market forces.
How apply keynasian economics
Keynesian principles underpinned policies like the New Deal and post-war economic planning.
Modern stimulus measures often reflect Keynesian thinking.
Monetarism
Popularized by Milton Friedman, this theory focuses on controlling the money supply to influence inflation and economic performance.
Core ideas og monetarism
Inflation is primarily a result of excessive growth in the money supply.
Central banks should maintain steady growth in the money supply rather than using fiscal intervention.
Application og monetarism
shaped policies during the 1980s, including Federal Reserve Chair Paul Volcker's actions to combat stagflation by aggressively raising interest rates.
Comparison og keynasiasm and monetarism
Keynesianism:
Advocates for active fiscal policies and demand-side solutions.
Focus on reducing unemployment during recessions.
Monetarism:
Prefers monetary policy as the main economic tool.
Focus on controlling inflation and long-term economic stability.
How do economist use fiscal or monetary policies
Fiscal policies provide immediate demand stimulus.
Monetary policies offer longer-term inflation control and liquidity management.
Central banks and governments coordinate during crises, as seen during the 2008 crisis and the COVID-19 pandemic.
