The Global Financial Crisis and its Budget Impacts in OECD Nations Fiscal Responses and Future Challenges
Fiscal Responses and Future Challenges
Edited by John Wanna, Evert A. Lindquist and Jouke de Vries
Chapter 2: The United States’ response to the global financial crisis: from robust stimulus to fiscal gridlock
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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