The past several months have been unprecedented- no one could have predicted the economic and social turmoil caused by a global pandemic. It has led to a crash in stock markets and continues to reduce the amount of jobs available. The United States saw a rise in unemployment “which peaked at over 6m claims in one week at the end of March” according to the Guardian. This led many economists and political strategists to quickly adopt various economic measures to reduce the impact of the pandemic on the global economy. In particular, there are lessons that can be learnt from the actions taken in past economic crises, especially the 2008 financial crash. I will be analysing the policies adopted by large economic players in 2008, and which of these were the most effective in boosting the economy.
One of the main aspects shared by both crises is the level of uncertainty they have created. This is not easily addressed- it significantly lowers confidence and thus investment. Therefore, policies such as providing stimulus checks help to directly inject money within the economy, the idea being that consumers will spend this money, providing an economic boost through demand pull inflation. This was an approach that was adopted immediately in March by both the US and UK economies, with the US passing a $2 trillion stimulus package – the Coronavirus Aid, Relief, and Economic Security Act. Similarly, in 2008, the Economic Stimulus Act was passed with the aim of a fast, direct way to reboot economic growth, which allowed eligible individuals to receive a one time $250 Economic Recovery Payment. Such policies are vital to economies in the short term, as they provide an immediate injection to help circulate money within the economy as a temporary measure.
The use of stimulus packages helps to not only reduce the length of the recession, but also the extent of it. As illustrated in Figure 1, Blinder and Zandi (2015) estimate that had fiscal stimulus been ‘absent… the economy would have continued to contract until the fourth quarter of 2009.’. This proves why ensuring a stimulus package is passed immediately is a priority- even if it is a short term provision, it reduces long term losses.
Another policy adopted in 2008 involved cutting taxes. Another aspect of the Economic Stimulus Act of 2008, it imposed temporary tax cuts on households according to the tax policy centre. The American Recovery and Reinvestment Act of 2009 also reduced federal taxes by an estimated $287 billion over ten years, according to the tax policy centre. While policies such as these are typically intended as a short term solution, it was utilised again recently, as the level of corporate tax has been reduced. Although Trump is currently attempting to push for a cut to payroll taxes, it will be difficult to implement at the current moment in time, as suggested by the New York Times.
While many policies were adopted by governments, automatic stabilisers are particularly useful as they can be implemented immediately. These are pre-existing strategies that do not require action from bodies like Congress, such as unemployment insurance, or food stamps. If a recession hits and more individuals apply for such programs, the eligibility requirements will automatically be reduced and additional funds allocated immediately, incredibly beneficial during a sudden economic crisis such as this.
Monetary policy is another key tool that was utilized during the 2008 crisis, referring to instruments such as interest rates and quantitative easing. During the financial crisis, interest rates depreciated so as to encourage more borrowing. However, since the 2008 crisis, interest rates have continued to remain low with little beneficial impact, and so further cuts would not be effective in increasing levels of borrowing. Though it was effective in 2008, monetary policy is not the correct form of action to reduce the impact of the COVID-19 economic crisis.
In conclusion, it is clear that this pandemic has shaken the very foundation of our economic systems. However, many institutions have remained resilient, and acted immediately to reduce the impact. The 2008 crisis provides many insightful strategies and policies that have helped us not only sustain the economy during this period of uncertainty, but also create optimism that there may not be a deep recession. Both recessions have revealed how fragile our economic institutions can be, allowing us to improve weak areas so as to be better prepared for future economic threats that may arise.