Recessions don’t have to be followed by periods of slow economic recovery, a recent paper by Berkeley economics professors Christina Romer and David Romer found, which explored reasons for why the 2008 financial crisis was especially difficult to recover from.
The paper found that many developed countries bounced back quickly after recessions over the past century, contrary to conventional wisdom. Why then was 2008 followed by such a severe economic slump?
Low interest rates close to zero in many countries, including America and Japan, leading up to the global financial crisis may have made recovery slower, according to the report, which raises questions about whether future government policies can prevent history from recurring.
The 2008 crisis was also a different kind of recession. Throughout the last century, the U.S. economy fell into recessions in response to the federal reserve increasing its rates to counter inflation. After the Federal Reserve cut rates, recovery soon followed. By contrast, the 2008 financial meltdown was caused by risky lending practices in the private sector and the usual solution of lowering rates was made less effective by already low interest rates.
Additionally, tighter fiscal policies, including tax hikes for high income Americans, may have slowed down recovery, the report concluded.
Critics of President Barack Obama’s economic policy believe the report supports their argument that tax hikes, additional spending on unemployment benefits, and minimum wage increases actually hurt the economy.
Fiscal conservatives hold that increases in government spending under the Obama administration—operating under the Keynesian economic view that spending stimulates the economy—did more harm than good.
They point out that added subsidies for unemployment and several minimum wage increases after 2007 were disincentives to work and made labor more expensive for businesses, slowing recovery from high rates of unemployment.
“In hindsight, a lot of the spending was wasted. We can see that they spent the money but they didn’t get the lowered unemployment rate or the GDP that they forecast,” said Diana Furchtgott-Roth, senior fellow at conservative think tank Manhattan Institute and director of Economics21 at the institute.
Furchtgott-Roth, who served as economic adviser to former U.S. Presidents Ronald Reagan and George W. Bush, said, “[Obama] handled it poorly and he could have done more. He could have pursued a different path and lowered taxes and regulations.”
Taxes were raised on higher income Americans, having less of an effect on the middle class.
President Obama ignored the economic principles that warned against increased taxation and disincentives to work so that he could aid people in need and prevent severe poverty in the face of a major disaster.
Still, in the long run, his policies may have worsened unemployment, affecting the same people the subsidies and benefits were meant to aid.
“Now after over five years, we’re starting to create jobs,” said Furchtgott-Roth.