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T HE G REAT R ECESSION E XPLAINED
The Great Recession
Explained
The American economy has experienced some
major changes over the past several years, and the
American people have been closely watching its
every move. With an immense amount of media
coverage and political discussion surrounding this
issue, it can be difficult to extract the basic causes
and effects that are associated with this “Great
Recession.” The impacts of this recession have
indeed been greater than most other recessions,
however all recessions are caused by the same
downward economic spiral. While politicians
disagree about how to escape this recession, the
solution can be clearly identified by applying
simple macroeconomic theory.
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directly correlated to consumer spending behaviors.
People generally cut their spending habits in an
effort to save as much as possible. As this trend
spreads across the country, less and less capital is
directly infused into the economy, resulting in a
decline in GDP. As the GDP continues to decline,
companies tend to lay off workers in order to cut
cost, which results in a rise in the unemployment
rate. The increase in inflation and unemployment
rate coupled with a decline in GDP ultimately
causes an economy to fall into a recession.
What is a recession?
A recession can be classified as any significant
decline in economic activity within a country
lasting longer than 2 quarters. This decline in
activity can be observed in industrial production,
employment, real income as well as wholesaleretail trade. A recession generally lasts between 6
and 18 months, with interest rates declining during
this time in an effort to stimulate the economy and
encourage the borrowing of monies.
What causes a recession?
Many factors can contribute to an economy’s
ultimate decline into a recession, but one major
cause is that of inflation. Inflation is described as a
rise in the prices of goods and services over an
extended period of time. As the rate of inflation
increases, the proportion of goods and services that
can be purchased with the same amount of money The “downward spiral” of events which cause most
declines. When the inflation rate increases, it is
recessions. Courtesy of HowStuffWorks.com
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T HE G REAT R ECESSION E XPLAINED
What caused the American economy to money is being pumped into the country’s
economy, so the economic state of our country also
fall into “The Great Recession”?
improves.
This most recent recession that the United States
suffered is often referred to as “The Great
Recession”. According to National Bureau of
Economic Research, the recession began in
December 2007 and ended in June 2009. The stock
market crash of 2000 set the ground work for the
recession. The Federal Reserve lowered the
interest rate to help with the economic slowdown
created by the crash. This action led to banks
giving out loans to individuals and companies that
were not truly qualified to pay back their loans.
Thus many people defaulted on loans. On the
company level, if a certain company could not
afford to pay off a debt they had to find a way to
cut their costs. The easiest and fastest way to cut
costs is to decrease labor, so firms were forced to
make massive layoffs. Increased unemployment led
to a decrease in consumer spending.
How can we recover from this
recession?
Where do we start?
To get this cycle of spending started, This
consumer spending can be initiated by either an
increase in government spending or a decrease in
taxes. Both lead to the same effects and get our
nation out of recession. It may seem odd to many
Americans that in order to make more money we
need to spend more money - but it is a proven
theory and a necessity to overcome this Great
Recession.
What improvements have been made?
To help fix “The Great Recession” the government
has implemented several forms of legislation to get
the country back on track, such the stimulus
package and the Recovery Act. The main purpose
behind these bills was to get people back to work
Macroeconomics teaches us that the only way to
get out of a recession is to spend. Economists have and stimulate the economy through spending,
whether that was through bailing out big
spent years theorizing the solution to a recession
companies like the auto industry and saving them
and discovered it all comes down to spending.
from bankruptcy or funding new government
Once spending on goods and services increases,
projects in infrastructure, clean energy and
inventories of businesses decrease. When firms
have less available merchandise they are forced to education.
hire more people to produce more goods. This
means an increase in labor demanded by
companies to keep up with the increase in products
demanded. As industries hire more people to keep Many Americans are under the impression that
government spending is preventing our economy
up with production, those people make more
from recovering from “The Great Recession”.
money and have more to spend. Consumer
Macroeconomic theory proves that this is not the
spending then increases, so part of their income
case. Both government and consumer based
goes back into the goods market, and the cycle
starts all over again. As people spend money, more spending are absolutely necessary to pull a nation
out of recession.
people get jobs so the unemployment rate goes
down, which is a definite sign of overall
improvement. In addition, GDP goes up since more
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T HE G REAT R ECESSION E XPLAINED
References
Harvey, J. T. (2011.) The Great Recession: How
We Got Here (and How to Get Out).
Forbes. 07 October 2011. Accessed 22
November 2012. online. http://
www.forbes.com/sites/
johntharvey/2011/10/07/the-greatrecession/
Joint Economic Committee Congress of the United
States. (2009). The Challenge of Creating
Jobs in the Aftermath of “The Great
Recession”(S. HRG. 111523).Washington, DC: U.S. Government
Printing Office.
Recession. (2012, JANUARY). Investopedia.
Retrieved from http://
www.investopedia.com/terms/r/
recession.asp
Stiglitz, J. (2009). Interpreting the Cause of the
Great Recession of 2008. Retrieved from:
http://fcic-static.law.stanford.edu/
cdn_media/fcic-testimony/2009-1020Stiglitz-article-2.pdf
What causes a recession?. (2012, JANUARY).
Investodpedia. Retrieved from http://
www.investopedia.com/ask/answers/08/
cause-of-recession.asp