The Great Recession is remembered, and properly so, for its massive destruction of household wealth and job losses that reached over 800,000 in a single month. In just the fourth quarter of 2008, real GDP fell at an annual rate of 8.4 percent, while economies across the world were savaged by problems as bad as or worse than our own. Remembered too are the scars left by the economy’s punishing decline: an uneven recovery, many workers who remain disconnected from the job market, an increased debt level, and permanent losses in GDP.
We should also recall how bold and decisive policy actions quickly stopped and reversed the decline. Thanks to a massive countercyclical fiscal stimulus, unprecedented Federal Reserve monetary policy actions, and bold steps to stabilize the financial system, GDP resumed growing in the 3rd quarter of 2009 and rose vigorously in the 4th. Economists estimate that, by 2011, real GDP was 16 percent higher and unemployment was almost seven percentage points lower than they would have been had such firepower not been deployed.
The economic expansion that started almost ten years ago continues to this day.
Policymakers should know that the “stimulus,” derided as an “8-letter word” in the overheated political debates at the time, worked; though not every program performed equally well. So, they should examine the findings of mainstream economists who have documented the effectiveness and limitations of the policies which steered our economy away from the abyss.
Recessions are inevitable. Policymakers who might rely on Federal Reserve policy as the lone response to recession should think again; we know that fiscal stimulus is effective. Furthermore, economic conditions have changed; were the U.S. economy to fall into recession in this current low interest rate environment, the Fed’s monetary policy options would be far more limited than they were in 2009, and a higher debt level could complicate the use of discretionary stimulus. Consequently, policymakers should learn about proposals to help the next recovery start faster, make job creation stronger, and restore confidence to businesses and households so they resume investing and spending again. Enacting these proposals in fully reasoned detail before the next recession strikes will help us avoid the delays and risks associated with writing stimulus legislation in the middle of a meltdown.
This volume—a joint project by The Hamilton Project and the Washington Center for Equitable Growth—focuses on the workhorse antirecession programs known as “automatic stabilizers.”
As defined by the Congressional Budget Office, “automatic stabilizers are the automatic increases in revenues and decreases in outlays in the federal budget that occur when the economy strengthens, and the opposite changes that occur when the economy weakens.” Our tax system is an automatic stabilizer because revenues decline with income. On the spending side, the most-familiar automatic stabilizers include unemployment insurance, Medicaid, and the Supplemental Nutrition Assistance Program. These programs direct benefits to the people and places most deeply affected by economic shocks, and to the beneficiaries most likely to spend rather than save, helping households meet basic needs while providing stimulus that in turn saves or creates jobs. The boost to the economy from such automatic stabilizers can be timely, aimed at populations impacted by the downturn, and designed to end when conditions improve.
Our institutions recruited a distinguished group of scholars who could build on lessons learned from the Great Recession and create actionable proposals for deploying automatic stabilizers, in the form of reformed or entirely new programs, to fight the next economic downturn.
Some proposals suggest ways to make more automatic those programs that were often previously used for discretionary stimulus: direct payments to individuals, aid to states, and transportation spending. Other proposals suggest reforms to existing safety net programs to make them more-effective automatic stabilizers.
These proposals share several strengths in common. They are evidence-based, actionable, and familiar. They improve and reform the automatic stabilizers that have proven effective in fighting the thirteen recessions that have hit the United States since 1929. In confronting economic downturns for which there are no “magic bullets,” they demonstrate different approaches available to policymakers for alleviating the pain visited upon households and for restoring the economy to health as rapidly as possible. They all contain triggers, which assure markets that neither excess spending nor premature austerity will harm the economy going forward. By debating these policies and, ideally, enacting the best of them now, policymakers can effectively hedge against the delay and gridlock that have so often ensnared urgent responses to national crises.
Chosen excerpts by Job Market Monitor. Read the whole story @ Recession Ready: Fiscal Policies to Stabilize the American Economy | The Hamilton Project