How we avoided another Great Depression

The Great Recession would have become the Great Depression 2.0 without the effective response of federal policy, according to a new report. Using Moody’s Analytics’ highly respected macro-economic model, the report authors estimate that if the federal government had not used fiscal, monetary, and spending policy tools, the national economy would have lost twice as many jobs and the economic downturn would have lasted twice as long.

After seven years of an official recovery and a state policy debate that often ignores our country’s most recent and historic downturn, it can be easy to forget just how bleak things looked in 2008 and 2009. North Carolina lost nearly 8 percent of its jobs from the start of the Great Recession to the trough in the labor market, and unemployment remained in the double digits for 34 months from February 2009 until October 2011.

Yet things could have been worse, much worse. Absent federal interventions, the national unemployment rate could have ballooned to almost 16 percent and would have been in the double digits up through last year. Aggressive moves to prop up the financial markets and boost the economy through direct government spending moved the economy back into growth mode earlier and eased the economic harm of job losses.

The report also provides evidence that most types of direct government spending had more effect than tax cuts. The federal response included both tax cuts and increases in government spending. Direct spending generally produced higher benefits, and the best economic bang for the buck came from programs that provided assistance to people struggling to survive the recession, such as increasing the value of food assistance and access by waiving time limits for childless adults and extending the length of time that jobless workers could continue to receive unemployment benefits.

A key lesson of the Great Recession and current recovery is it can be damaging to have quick swings from stimulus to austerity before the economy has achieved self-sustaining growth. Efforts in late 2008 and early 2009 kept the recession from becoming a depression, but subsequent choices like sequestration have contributed to the slow pace of the recovery.

A central lesson for North Carolina is that cutting back on programs that help people weather bad economic times actually makes those times even worse. North Carolina leaders have chosen to cut back on many of the types of programs that got the country through the recession. When our state dramatically reduced the length of time that people who lost their jobs could depend on unemployment insurance, it hurt the entire economy. When we limit access to food assistance, even in places where there still are not enough jobs, local economies suffer. Minimizing the harm of economic downturns to people and communities makes for quicker and stronger recoveries.