2008-09 vs. 2020+ Redux

Vox has another good piece out contrasting the economic uncertainty and challenges posed by coronavirus relative to that of the 2007-09 financial crisis and Great Recession. (I think we’re going to see this genre proliferate.) Recommended reading:

I like former Rep. Barney Frank’s (D-MA) take: “This one is scarier to me, because we knew how to handle the other one.* The other one was a result of human error and bad decisions. This is different.” Rep. Frank was the Chairman of the House Financial Services Committee during the Great Recession, and the “Frank” namesake of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

That said, I think today’s policy responses are shaping up to be much more similar to 2008-09 than the authors suggest. That’s certainly true of the Fed’s aggressive playbook of late. On the fiscal side the $1,200/$2,400 lump-sum tax cuts in the CARES Act are roughly a scaled-up version of the lump-sum tax rebates from the Economic Stimulus Act 2008 (enacted in February 2008, a year ahead of the Recovery Act of 2009). And Congress should take a nod from 2009 and turn on the spigots to state budgets by increasing the Federal Medical Assistance Percentages (FMAP), the federal cost-sharing rates for state Medicaid programs. State fiscal relief via FMAP increases was a significant chunk of the Recovery Act. House Democrats were recently pushing for FMAP increases, and this issue will almost certainly be revisited as state revenues dry up, Medicaid programs are walloped by the pandemic, and balanced budget amendments start to force budget cuts in the midst of a recession… balanced budget amendments are truly ill-conceived budgetary policies that exacerbate recessions, but I’ll save that for a future post.

*Important caveat to Frank’s point: Knowing does not always translate to doing. A premature withdrawal of federal stimulus and pivot to fiscal consolidation in 2010-14, forced by House Republicans, greatly stymied our recovery from the Great Recession. State-level spending cuts and tax hikes, necessitated by balanced budget amendments, further slowed recovery. It took the U.S. labor market over a decade to recover—which amounts to an abject policy failure, with one aisle of Congress largely to blame. Recommended related reading:

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