Mark Thoma: The Great Lesson from the Great Recession:
Is there a similarly important policy lesson to be drawn from the Great Recession we’ve just experienced?… The Fed did avoid the big error of allowing massive bank failures and declines in banking reserves that were so problematic during the Great Depression, and many people give the Fed credit for avoiding a Great Depression type collapse…. I would not have wanted to experience a repeat of the Fed’s failures during the Great Depression…. When the recession hit this time around, we had a much, much higher level of societal wealth, and hence a much larger cushion to absorb the shocks than we had during the Great Recession. Second, and importantly, the presence of automatic stabilizers, particularly those that come in the form of social insurance programs, made a big difference…. Third, it’s not as though the Fed created a miracle recovery…. The improved response of monetary authorities and the existence of automatic stabilizers certainly made the downturn far less severe than it might have been, but a big lesson from our recent experience is that these policies alone are not enough to turn the economy around. Help from fiscal policy is needed…. Congress failed to implement a fiscal stabilization package that was large enough to address the big problems the economy was facing, and due to Republican opposition it refused to implement additional measures when it became clear the initial package was too small in both size and duration…. That failure was bad enough. But even worse is that fiscal policymakers actually began moving in the wrong direction--toward austerity--at a time when just the opposite policy was needed. The result has been a much slower recovery than we might have seen otherwise. After the Great Depression, the Fed learned from its mistakes…. But what about fiscal policy? Will fiscal policymakers in the US and Europe learn from the big mistakes they made recently--mistakes that have prolonged the recession and imposed permanent harm on some members of society? As much as I’d like to hope that somehow economists will speak with a strong, unified voice on the usefulness of fiscal policy in deep recessions, a position I believe is firmly supported by the empirical evidence, and that politicians--Republican politicians in particular--would follow their advice, it’s hard to imagine either of those things happening. That means, discouragingly, that the next time a severe recession hits fiscal policymakers will likely fail us once again and leave us with yet another unnecessarily slow, agonizing recovery.