A new report produced by the Center for American Progress aims to divine the policy lessons that we’ve learned in the wake of the Great Recession. The report offers three major lessons (the latter two of which I would have expected to have been obvious going in to the recession, but obviously were not) coming out of this experience which might help future policy making efforts. I’m hopeful, but not quite ready to hold my breath.
There are three major lessons for policymakers from this research:
- Direct government intervention during recessions, either through deficit-financed tax cuts or deficit-financed increases in government spending, is a more powerful tool for fighting recessions than we realized before the Great Recession.
- In a slack economy, or one that is operating below its potential, austerity—taking money out of the economy to balance government budgets—is especially bad policy. Whether via tax hikes or cuts in government spending, contracting the government’s budget during a recession reduces gross domestic product, or GDP, by more than the size of the cuts—possibly as much as three times more.
- The costs of doing nothing can be permanent and much higher than we previously thought: U.S. GDP is currently 10 percent below its prerecession 2014 projection, and many economists believe that we have reached a new normal. If this is true, austerity could cost the U.S. economy more than $1 trillion in economic activity every year, even after we have fully recovered from the Great Recession.
Read the full report here: