Table of Contents

The Global Financial Crisis and its Budget Impacts in OECD Nations

The Global Financial Crisis and its Budget Impacts in OECD Nations

Fiscal Responses and Future Challenges

Edited by John Wanna, Evert A. Lindquist and Jouke de Vries

The global financial crisis of 2007–09 constituted the biggest shock to the economies of the OECD nations since the Second World War and caused most of their governments to move into intense crisis mode. They made significant adjustments to their fiscal policy regimes, including massive interventions to stabilize markets and economies. But how they reacted to the crisis, and what measures they took to deal with it, still underpin their economic and budgetary positions. This singular shock provides the editors and authors of this book with an intriguing opportunity to examine how different OECD budgetary systems performed. Chapters cover the EU, North America and Asia, assessing how governments responded to the challenge and how their budget systems evolved in the aftermath.

Chapter 2: The United States’ response to the global financial crisis: from robust stimulus to fiscal gridlock

Paul L. Posner and Denise M. Fantone

Subjects: economics and finance, public finance, public sector economics

Extract

The global financial crisis (GFC) arrived at a most inopportune time for the United States. The budget was already burdened with substantial new fiscal imbalances, as the nation stood on the precipice of the retirement of the ‘baby boom’ generation. The chronic deficits with which the nation had struggled for the better part of 35 years were scheduled to explode to unsustainable levels through the next several decades unless serious reforms were undertaken on the spending and revenue sides of the budget. The financial crisis accelerated the day of fiscal reckoning, prompting deficits to exceed 10 percent of gross domestic product (GDP) – the highest peacetime deficits in US history. The crisis affected fiscal balances in two ways. First, the sharp fall in economic growth and jobs triggered automatic stabilizers, which caused revenues to plummet to a record postwar low accompanied by higher spending. Second, both the Bush and Obama administrations were forced to make unprecedented commitments of new federal resources to rescue large financial firms and jump-start the economy through a stimulus initiative approaching US$1 trillion over several years. These two policy actions were estimated to have saved nearly 8 million jobs, which some felt saved the economy from toppling into a depression (Zandi and Blinder 2010). While the economy has been officially deemed to be out of the recession, growth is slow and many worry about a ‘double dip’ recession.

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