Problem
By May of 2020, there was little doubt that the United States (U.S.) had entered a recession. Stock markets had been volatile and subject to sustained periods of decline after February of 2020, and over 20 million people filed for unemployment in May of 2020 (Schwartz, 2020). Economists learned many valuable lessons about fighting recessions amid the 2008-2009 financial crisis. They learned that fiscal policy can be an important antidote to falls in Aggregate Expenditure that occur during a recession. Fiscal policy had taken on more limited importance, and economists and policymakers realized the monetary policy was relatively more effective in some circumstances.
However, the unique role played by fiscal policy has been reestablished following the events of 2008-2009. Professor Valerie Ramey is a leader in the field of fiscal policy research. She has spent her career trying to pin down multipliers that measure the impact of government spending and taxing on the overall economy. Professor Ramey found that there are many worthwhile steps the government can take to support households and businesses during a slump, but the timing and circumstances cannot be ignored.
In a podcast episode in the spring of 2019, Ramey summarized the broad body of fiscal policy research occurring over the last ten years.
Task
1) Describe the role, including limitations, that you see fiscal policy playing in an economic downturn.
2) Is it wiser, in your opinion, to rely on built-in stabilizers to moderate fluctuations in economic activity rather than utilizing more activist discretionary policies designed to offset sudden declines in GDP?