As banks faltered and default rates rose, rates of consumption and demand plummeted. Unemployment began to increase, and in a predictable Keynesian fashion, as individuals grew more insecure about their job prospects they began to spend less money. The United States has a particularly consumer-driven economy -- Americans are known for having historically low rates of savings and to engage in high rates of spending -- so this was particularly disruptive to the usual rhythms of the economy.
Young people graduating from college suffered some of the worst effects of the recession. "Unemployment rates for individuals younger than 25 are currently 21% in the euro area and 19% in the U.S." (Branchflower 2010). They were competing with older, more experienced workers who had recently lost their jobs. The fear is that today's low starting salaries create a class of permanently low-earning graduates, many of whom have high levels of college debt. Graduates today often find themselves forced to live with their parents rather than aspire to own their own homes as they build faltering careers. The rush to create a new class of homeowners may have ironically created a permanent class of younger people with slim hopes of ever owning their own abode.
Responses to the financial crisis
"Even before taking office, President Obama began work on a stimulus package. On Feb. 11, 2009, Congress gave final approval to a $787 billion bill, the American Recovery and Reinvestment Act" ("Economic stimulus," Times topics, 2010). However, the bill was considerably leaner than originally intended, because of Republican opposition to the spending bill. The Obama Administration was pressured both on the right and the left. Leftist critics were angry that banks and large industries, such as the automotive industry, had been bailed out by the federal government, while ordinary people were still floundering. They argued that the bill offered little help or hope for Americans under water with their mortgages, who owed more on their homes than the homes were worth. Republicans criticized the deficit-making potential of the bill and called for tax cuts rather than government spending. However, even Democrats such as Harry Reid supported a "$15 billion measure focused on a payroll tax exemption for companies that hire new workers, an idea that had been raised by Republicans as well as Democrats" ("Economic stimulus," Times topics, 2010). While the stimulus bill was praised for creating an estimated 2.5 million to 3.6 million jobs, a number of the stimulatory measures have been called transient rather than truly radical and transformative of the nation's infrastructure unlike Roosevelt's New Deal. The 'Cash for Clunkers' program designed to encourage the purchase of newer and more fuel-efficient cars and a tax credit for first time homebuyers temporarily caused a boost in sales and the economy as a whole but dissipated when the programs ended.
Conclusion
Nobel-prize winning economist Paul Krugman has stated that the American economy, although not technically in recession, is in a false recovery. "Growth is currently running somewhere between 1 and 2%, with a good chance that it will slow even further...
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