Recessions and Recoveries
We are now three years into the financial crisis triggered by the bursting of the housing bubble, and more than two years into the resulting recession and lingering aftermath. It was the deepest recession we experienced in a generation—by some measures, the deepest since the Great Depression of the 1930s. In terms of economic policy, however, we have regressed to the early 1970s, before the last “great recession” of 1974-82, when Richard Nixon infamously said “we are all Keynesians now.” Today’s policy debate has been dominated by ideas that were tried, and found wanting, during the 1970s. The policy responses to date have consisted of two sets of actions. One is increased federal spending and “targeted” tax breaks, based on the theory of a “multiplier” effect that will result in each dollar spent and each dollar of tax relief being respent several times. The second is unnaturally low interest rates. This combination of policies failed to generate economic growth a generation ago but is being tried again on a far grander scale today.