Global Financial Crisis - PDF

Overview of the Fiscal Policy
Between 2007 and 2017
It has been widely acknowledged that the Global Financial Crisis hit the USA in
December 2007. The USA has been a country that has handled handled the Global
Financial Crisis well and seems to have achieved a spectacular recovery.
(Organization for Economic Co-operation and Development, 2016) The reasons for
this spectacular recovery can be attributed to the monetary and fiscal policies that
followed the crisis.
The US Government , generally, followed neo-liberal policies since1980s. Neo
Liberal policies imply that there is a tendency towards market de-regulation and
limited government controls and lower public spending by the governement.
(Brown, 2003) However, the real Discretionary spending of the USA government in
the economy, also, continued to grow at an average rate of over 3%. Government
spending dipped slightly during the few years prior to the financial crisis of 2007.
(Federal Reserve Bank of Cleveland, 2015). The Crisis forced the USA to adopt near
zero Federal Fund rates and help increase the money supply within the economy by
way of quantitative easing. (Tyson, 2013) The Fiscal policy also followed an
expansionary path i.e it allowed for greater spending by the government in the
economy and tax cuts for people. The idea was to increase the money supply within
the economy and provide a stimuls to wages which in turn would keep the
consumer spending high. (Rich, 2013) For the first two years, the policy seemed to
work as the rate of growth of GDP within the first year of the crisis seemed to be the
same as the rate of growth within the first year of recovery during the great
Depression. (Tyson, 2013) Fiscal policy seemed to be very important since it was
observed that the multiplier effect of the fiscal policies seemed to be greater than
the multiplier effect of the monetary policy. (Auerbach, 2009)
The impact of this policy began to fizzle in the year 2011. One of the reasons cited
for the low increase inoutput and GDP was the high level of national debt which
seemed to have been affecting growth. This was attributed to the “crowding out”

effect that high government debt may have had. High government debt may have
inhibited the private investment within the economy. However, there is no strong
evidence to corroborate this theory, so far. (Tyson, 2013) The expansionary policy
remained in place , even during the post crisis period i.e post 2009.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
20
40
60
80
100
120
Government Debt as a % of Total
GDP
Graph 1 Budget Deficit of USA since 2007
Source: (The World Bank, 2017). Prepared by Author
The US economy has rebounded since the supposed end of the recession in 2009.
The National Output surpassed the pre-crisis national output level by approximately
10 %. Wages in the private sector and corporate profits seemed to be high , while
fiscal stability seems to have been restored. (Organization for Economic Co-
operation and Development, 2016)