Lessons of Economic Recessions

Laura Blessing | May 6, 2020

In politics, we often learn the lesson of the last time.  Our current economic troubles prompt comparison to previous episodes, particularly the 2007-2009 Great Recession.  While the past six weeks may seem like an eternity to many Americans, we are early in the government response to this crisis, particularly its economic effects.  The future is still uncertain, and can still be shaped.  But some early trends appear clear, as are lessons we’ve taken from the past, as well as the limits of those previous examples.  While other parts of the federal response may be characterized as too little, too late, Congress has given a fast, powerful response to this crisis.  But we’re approaching uncharted waters.

Lawmakers have been confronted with an extreme situation.  Putting the health aspect of this crisis aside, we’ve seen metrics that are historical outliers.  In the past six weeks, over 30 million Americans have filed for unemployment, as the Department of Labor reports weekly.  The Commerce Department’s monthly retail report for March showed an 8.7% decline in sales.  Consumer spending is 70% of GDP, so Americans spending less (both out of economic insecurity as well as shuttered businesses) will have a long-term effect on GDP, which has already appeared.  The pandemic hit the US economy late into the first quarter of the year, but last Wednesday Commerce already reported a 4.8% decline in (Q1) GDP.  Of course, there are many additional indicators; global trade is down, the Dow dropped precipitously but has regained a substantial amount of those losses, and while some goods are scarce, there is a glut of others—the price of oil (American benchmark crude) went negative for the first time in history two weeks ago.  As Americans start to miss rent payments we’ll see an effect on the housing market.  The fast-moving nature of this crisis has some bemoaning that economic data comes out too slowly to capture what’s going on.  And of course, there are plenty of projections for the future.  A vaccine is still likely at least a year away.

The above description is too short to serve as a comprehensive economic account of the economic effects of the pandemic.  But it shows some early learning on Congress’s part, as well as highlights how our current difficulties are different from previous episodes, particularly the Great Recession.  The first big lesson that Congress has learned is that, in the face of an economic crisis, one wants a strong fiscal response, fast.  The 2009 Recovery Act, originally estimated at $787 billion, has been widely characterized by economists as successful but too modest for a stronger recovery, and while it was passed quickly in the 111th Congress, the recession was well underway.  (The Troubled Asset Relief Program—TARP–was authorized through the Emergency Economic Stabilization Act passed in October 2008, also relatively late.) 

While TARP had bipartisan support in Congress, the Recovery Act did not.  The contrast, thus far, is striking.  Congress has passed four major coronavirus aid bills, beginning in early March, before businesses started closing.  The current total is about $2.9 trillion; the CARES Act alone cost $2.2 trillion.  These bills have been more than just bipartisan—they’ve gotten nearly unanimous yes votes.  They’ve also shown a strong hand by congressional negotiators; the White House’s interest in items such as a payroll tax cut and the relative size of these bills has gone unheeded.  Given that the Paycheck Protection Program is only designed to protect businesses through June, more will surely be coming.

Here’s where the contrast ends.  The biggest unknown, thus far, regards the size and type of response necessary.  Early economic indicators for the pandemic dwarf those of the Great Recession.  Furthermore, a pandemic’s effect on the economy, where stay-at-home advisories inhibit growth, are far different than the injection of toxic mortgage-backed securities into the world’s markets.  For example, monetary policies such as cutting interest rates are unlikely to have the same stimulative effect when most Americans aren’t leaving their homes.  And the noises out of party leadership suggest that additional legislation will be more partisan, more difficult to pass, and smaller, with the issue of aid to states having emerged as a major point of disagreement.  Austerity would be the wrong lesson to learn from the Great Recession, as would a preference for monetary over fiscal policy.

There are lessons that Congress is in danger of not learning, too.  The first is the need for effective oversight of government lending and stimulus policies.  The most memorable 2008 example is that banks that received TARP funds gave out bonuses—this unsurprisingly angered Americans, even though the TARP funds were paid back.  Far more oversight (and for stimulus spending, not just lending) will be needed now.  The second is unequal concern for the most vulnerable in our society that is seen in some aspects of the coronavirus legislation and regulation.  While job losses were steadily reversed with the Great Recession, they took longer to reverse than previous recessions since 1980, and while the wealthiest in society recovered (and thrived), the most vulnerable did not, fueling greater wealth inequality.  Economic inequality and political populism had dire consequences from the Great Recession—the challenge is far greater today.

Finally, there is a lesson to hope Congress doesn’t learn, one that pertains not to effective economic policy or good government oversight, but to the politics of backlash.  While both the TARP program and the Recovery Act had room for improvement, both the Bush and Obama administrations deserved credit for the stabilizing effects of these programs, and received opprobrium instead.  Vocal minorities can have a powerful effect on American politics.  Populist sentiments, particularly in times of crisis and inequality, can be both more widespread and more politically consequential.  Congress has acted quickly and decisively thus far—they need to keep their eyes on the ball.  There are more dire standards for comparison than a decade ago.

Laura Blessing is a Senior Fellow at the Government Affairs Institute

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