REBC Questions

1. Compare what I call the current Neoliberal era in economic history with previous eras. Present at least two important distinctions between our current Neoliberal era and both the Gold Standard and Cold War eras.  

The current  Neoliberal era, which gained prominence in the 1980s and continues into today, is characterized by a set of economic policies that prioritize free-market capitalism, limited government intervention, deregulation, and a focus on individual entrepreneurship. Neoliberalism emerged as a response to challenges faced by Keynesian economic policies during the Cold War era, which dominated the mid-20th century. Neoliberalism advocates for reducing the role of the state in the economy, emphasizing the efficiency of market forces and the private sector. Key tenets include promoting free trade, privatization of state-owned enterprises, fiscal austerity, and an emphasis on the individual. The Neoliberal era is associated with increased globalization, financial market liberalization, and a belief in the capacity of markets to drive economic growth and prosperity. This differs from the Cold War era in that the government became much more hands-off, and that capital had much more freedom than before, in which it was forced to be reinvested. It also differs from the Gold Standard era in that many currencies became free-floating during this time, rather than the rigid controls during the Gold Standard Era. Also, the Neoliberal era has much more free trade than the Gold Standard era, when tariffs dominated most export-import markets.

2. Discuss the Great Recession of 2008. Inform your site visitor what exactly happened to cause the crisis. What happened to GDP, economic growth, inflation, and Unemployment?

The Great Recession of 2008 was the worst economic downturn since the Great Depression. In the early 2000’s the US was experiencing a major housing market boom. Due to low interest rates, widespread home-buying and mortgage lending was encouraged. Overtime, lenders began offering more subprime mortgages (loans with very high interest rates) to borrowers with deteriorating credit. Eventually these same lenders began to bundle these subprime mortgages into financial products like MBS (Mortgage Backed Securities) and CDO’s (Collateralized Debt Obligations)- these products were sold to investors, spreading even more financial risk. Due to speculative interest, the demand for housing markets soared even farther, causing severe inflation of the housing market. When interest rates began to rise, so did mortgage payments leading to an increase in mortgage defaults and foreclosures among these subprime borrowers. When the housing market peaked in 2006, the inflated values of these homes began to come back to equilibrium. This led to even more loan defaults as homeowners found themselves owing more money than their homes were worth. These defaults on subprime mortgages led to a loss in investor confidence, and financial institutions holding these MBSs’ and CDOs found themselves with plummeting security prices. Financial institutions began to be reluctant to lend money, leading to a lack of liquidity in the economy. As major financial institutions began to collapse the crisis spread globally, affecting worldwide financial markets. Stock markets began to collapse, and the crisis found itself leaking into the greater economy, leading to a great recession. During the recession, GDP dropped by 4.3%, Unemployment increased to 10%, and the economy experienced a significant contraction. The inflation rate at the beginning of 2008 was running close to 5%. By the end of 2008, the year-over-year inflation rate had decreased to 0.09%. 

3. Describe fiscal and monetary policy since the Great Recession of 2008. What fiscal and monetary policy actions were taken to facilitate economic stability and growth? Did the Federal Reserve engage in contractionary or expansionary policy? For what purpose did it do this? In your group’s estimation, was Federal Reserve policy successful? Why or why not? Be sure to include graphs in your explanation.

Since the Great Recession of 2008, both fiscal and monetary policies have been instrumental in stabilizing and fostering economic growth. On the fiscal front, the American Recovery and Reinvestment Act (ARRA) implemented in 2009 provided a substantial stimulus through tax cuts, increased government spending on infrastructure, and expanded social welfare programs. Additionally, the Emergency Economic Stabilization Act (EESA) established the Troubled Asset Relief Program (TARP) to stabilize the financial sector. The Fed also used expansionary monetary policy. The Fed adopted a Zero Interest Rate Policy (ZIRP), engaging in multiple rounds of Quantitative Easing (QE) to inject liquidity into financial markets, and implemented “Operation Twist” to lower long-term interest rates. The overall goal was to encourage borrowing, investment, and economic activity. While these measures are generally credited with averting a more severe downturn and supporting recovery, there are ongoing debates about the effectiveness of such policies, considering factors like the pace of recovery, income inequality, and potential long-term consequences.

4. Discuss some of the most harmful effects the COVID-19 pandemic has had on the U.S. economy. What happened to GDP, economic growth, inflation, and unemployment? What industries in our economy were affected the most? Why?

The COVID-19 pandemic significantly harmed the U.S. economy, causing major issues in various industries and economic sectors. The Gross Domestic Product (GDP), declined significantly, marking the end of a long period of economic growth. In the second quarter of 2020, the GDP dropped by a record-setting 9.1 percent, the biggest fall since we started keeping records in 1947. In April 2020, 20.5 million jobs were lost, wiping out 113 months of job growth. Women, non-white workers, low-wage workers, and those with less education were hit the hardest, especially in the leisure and hospitality industry.

Unemployment rates soared to unprecedented heights, aggravating income inequality and economic hardships. Consumer spending fluctuated, with retail sales plummeting by 8.7 percent from February to March 2020. While certain sectors like grocery stores and non-store retailers experienced heightened demand, others, including clothing stores and food services, struggled with substantial declines. Industrial production, spanning manufacturing, mining, and utilities, suffered a sharp decline and only partially recovered, posing challenges for sectors dependent on in-person work. The pandemic incited supply chain disruptions, influencing the production and availability of goods, and necessitating a reevaluation of global production strategies.

The financial shock from the pandemic affected businesses, financial markets, and investors. Small businesses struggled as well, with many closing down and causing local economic problems and job losses. Inequalities, especially among racial and ethnic groups, became more exacerbated. Socioeconomic factors, such as housing, education, and jobs, played a role in these disparities. Inflation was volatile during this period, shaped by disruptions in supply chains and shifts in consumer spending patterns. Governments prescribed different solutions to help businesses and households, including giving money through stimulus packages. The Federal Reserve took measures to stabilize financial markets and ensure liquidity. In conclusion, the COVID-19 pandemic created a big economic crisis, showing weaknesses and effective policy responses to address both public health and economic challenges.

5. How did the government and the Federal Reserve respond to the economic downturn caused by the COVID-19 pandemic? What monetary policy actions have been taken to facilitate economic stability and growth? Did the Federal Reserve engage in contractionary or expansionary policy? For what purpose did it do this? In your group’s estimation, was Federal Reserve policy successful? Why or why not? Be sure

to include graphs in your explanation.

The government responded to the economic downturn caused by the COVID-19 pandemic with an aggressive expansionary policy. The government used fiscal policy like the CARES act to stimulate the economy, while the Fed utilized aggressive monetary policy. The Fed lowered the interest rate even lower than the already historically low rates, bringing the federal funds rate to 0, buying back $700 billion of securities through quantitative easing, lowering the discount rate by 150 points, and allowing banks to lend out their required reserves to households and businesses. The Fed did all of this expansionary policy to keep the American economy from falling deeper into a recession. The supply shocks and mass unemployment caused by COVID were hurting output, and, therefore, Real GDP. The expansionary monetary policy would ‘inflate’ output to stop the country from falling into a deflationary spiral. Our group believes that the policy was successful, as real GDP has consistently stayed positive (5.9% growth in 2021) and historically low unemployment (3.4%, the lowest in 54 years) 

The following graphs display how the US economy was able to stop a recession, just through monetary policy (specifically the increased supply of loanable funds now available after the Quantitative Easing rounds and use of required reserves):

6. How were small businesses affected by the economic downturn caused by the COVID-19 pandemic? Specifically, do you see the government and/or Federal Reserve as having adequately supported them? If so, how? If not, why not?

COVID-19 had various effects on small businesses. Many small businesses closed due to the COVID-19 crisis. Small businesses, constituting over 99% of US businesses and employing 60 million people, were especially vulnerable to stay-at-home orders and the restrictions that followed. The sectors most affected included accommodations and food services, educational services, and arts, entertainment, and recreation, which could not adapt effectively to COVID-19 restrictions. Challenges included decreased demand, the cost of health and safety compliance, difficulty in adopting new business models, and challenges in installing new technologies​​, which heavily affected small businesses’ ability to remain economically viable. Actions to shore up small businesses included increasing access to credit and stimulus funding, like PPP loans. This involved tax incentives, launching local microcredit funds, and promoting reforms to encourage financial institutions to provide special forms of credit and longer-term capital access.  Efforts were made to help businesses transition to new operational norms, including partnering with educational institutions for training in areas like digital marketing, creating entrepreneurship zones, and subsidizing the cost of enterprise resource software. Support for expansion included public-private partnerships providing resources like mental health and childcare support, and initiatives encouraging local purchasing from small businesses​​ in order to make up for lost demand. The government and Federal Reserve played significant roles in attempting to support small businesses during the economic downturn caused by the COVID-19 pandemic. The government implemented various measures to alleviate their financial strain. One key initiative was the Paycheck Protection Program (PPP), which aimed to provide forgivable loans to small businesses to cover payroll and certain operating expenses. Additionally, tax incentives were introduced to ease the financial burden on businesses, and local microcredit funds were established to enhance access to credit for those in need. The Federal Reserve also took steps to support small businesses by implementing monetary policies that aimed to stabilize financial markets and ensure the availability of credit. Interest rates were lowered to historic lows to make borrowing more affordable, and the central bank engaged in asset purchases to maintain liquidity in the financial system. These measures were intended to facilitate access to capital for small businesses facing unprecedented challenges.