Since late 2007, or early 2008, the United States, and most of the world, have been in one of the deepest, longest recessions of modern history. This has caused a great deal of political and social consternation, especially because of the deep unemployment that is going along with the recession. The United States government, in several steps and at several stages, has tried different things to combat the recession, with a great deal of political controversy and a seemingly limited amount of success. I will try to describe these steps briefly.

This is not a complete history of the recession, which I (like most people, including many experts) don't fully understand. The basic history of the recession is that a speculative bubble in the housing market collapsed, leading to a general financial crisis. This started to happen in late 2007, and the dominoes fell afterwards. These were some of the basic steps taken by the Federal Government to combat the recession:

  1. Bush's stimulus package, officially known as the Economic Stimulus Act of 2008. This was when the recession was believed to be simply a short downturn, and it was (in hindsight) a rather mild measure: tax rebates of between three hundred and twelve hundred dollars to everyone who had paid taxes, and quite a few people who had not. These rebates were meant to boost consumer spending, which would stimulate the economy. The cost of the bill was around 150 billion dollars, which at the time seemed like a large amount of money. How innocent we were. The tax rebates didn't seem to stimulate the economy, although the added money in consumers pockets might have led to the speculative run on oil prices in the summer of 2008. However, the economy seemed to calm down into a "normal" recession until:
  2. Lehman Brothers. Although Bear Stearns, a large investment bank had collapsed and been sold to J.P. Morgan in the spring, things seemed to be pretty calm until September 15, 2008, when Lehman Brothers, another large bank collapsed. The Bush administration launched a plan called the Toxic Assets Recovery Plan, where around 700 billion dollars would be spent to buy up "toxic assets" that banks possessed. Considering the objections that could be made to getting 700 billion dollars together in a week, the plan had wide bipartisan support. The Bush administrations, as well as both John McCain and Barack Obama, supported the bill. There was, however, large objections to it from sections of both the Democratic and Republican parties. I believe the US political system is a coalition system, and this bill caused major rifts between the populist wings of both parties and their establishment wings. Whatever the politics, the economic success of TARP is hard to measure, since we don't know what would have happened without it. One of the major hazards at this point was that the financial system was going to seize up to the point where even the normal "background" lending that allows businesses to cover their payroll would fail. There was, I believe, the possibility that without TARP, the United States would be in Mad Max territory. However, so far the US Government had spent 850 billion dollars to combat the recession, and the only accomplishment had been to avoid total disaster.
  3. While major banks had stopped falling over like dominoes, the overall economy was still weak. The new President, Barack Obama, signed the American Recovery and Reinvestment Act less than a month into his presidency. This act was classical Keynesian Economics, combining a hefty tax cut (250 billion dollars worth) with a large amount of government projects (around 500 billion dollars). As can be believed, the political horse trading and controversy of this act was also immense, and it remains controversial. One of the reasons why it was so controversial is that it hasn't restored the economy to anything close to normality. Of course, much as with TARP, it is hard to say what type of shape we would be in without it. But even with this additional round of tax cuts and stimulus, the economy still has 10% unemployment. So far, the cost is around 1.6 trillion dollars to combat the recession, but the recession is still going on.
  4. Continuously, from the first stirrings of the recession until now, the Federal Reserve Bank of the United States, headed by Ben Bernanke, has fought recessions in the way it is meant to do: by cutting interest rates. Even before the recession, in the mid-2000s, the Federal Reserves target interest rate was 5%, which is not historically a high rate. Now, the Federal Reserve has a target interest rate of 0-.25%, meaning that they are basically trying to get banks to loan money to each other for free. The Federal Reserve's actions are just as important, or more important, than the actions of the Executive Branch, but they don't have the same popular political ramifications. If the Federal Reserve cuts interest rates by, say, one percentage point, it may lead to inflation that leads to the same erosion in purchasing power as direct taxes of, say, 100 billion dollars. However, it is much more politically acceptable for the Federal Reserve to interfere in the economy than it is for the Executive Branch to do so. The exact cost of the Federal Reserve's policies is difficult or impossible to estimate. However, the Federal Reserve's historically low interest rates don't seem to be able to end the recession either.

So, to sum up: despite the expenditure of over 1.5 trillion dollars by the Executive, under two (very) different administrations, and despite the Federal Reserve's attempts to get banks to lend money to each other for free, the recession still remains the deepest since the Great Depression. In other words, nothing is working. There are two major schools of macroeconomics when it comes to dealing with recession: the Fiscal Policy school and the Monetary Policy school. The Fiscal Policy school, also known as Keynesian economics, says that a government should cut taxes and increase expenditures to get out of a recession. Bush and Obama have both tried this. The Monetary Policy school says that changing the money supply is the best way out, by making banks loan money to each other cheaper, thus making it easier for businesses to get money and invest. The Federal Reserve has been trying this, with unprecedented 0% interest money, and it has had no effect.

But there is something even more surprising than this, which also may be a small silver lining. In both the Fiscal and Monetary schools, the basic doctrine is that too much government spending, too big of tax cuts (for the Fiscal school) or too low of interest rates (for the Monetary school) will lead to inflation. If tax cuts give consumers more money, and the government is spending on new projects, and businesses can borrow money for free to invest in infrastructure, there should be a lot more money around, which would lead to inflation. So what is perhaps more surprising than the fact that none of these tools has brought unemployment down, is that none of them has brought inflation (on the whole) up. In other words, none of the strategies taken by the Executive Branch or by the Federal Reserve has had either the positive or negative effects that any sane economist would believe them to have.

And this puts everyone at somewhat of loose ends. My own guess about this is that the underlying physical economy has changed so much in the past few years (in large part because of how information technology has cut costs), that some older financial models can't really explain how the actual economy works. But that is my own speculation. The only thing I can say for certain is that no government interference in the economy so far has had either the positive or negative effects that could be expected.

Log in or registerto write something here or to contact authors.