The 2012 presidential primary season is already upon us and the Grand Old Party is, not surprisingly, engaged in a grand old opportunity to rewrite history about the causes and consequences of the Great Recession. So it’s time, once again, to set the record straight.
The Great Recession was so great not just because of very sharp unemployment increases but also due to an unprecedented decline in wealth—as the Federal Reserve detailed in a report released this week. That wealth destruction is key to understanding the Great Recession since massive house price drops led to a foreclosure crisis that then fueled massive layoffs. Much of the unprecedented wealth destruction in 2007 and 2008 can be traced back to failed economic policies under President George W. Bush, when opportunities to put the economy and the labor market on the right track were ignored.
Incoming President Barack Obama’s hand was thus forced to first pass the American Recovery and Reinvestment Act of 2009 to save the economy from sliding deeper into an economic hole amid rising job losses, and to then tackle the problems that had been ailing the economy and American families—low incomes and rapidly rising prices for health care and energy—for the previous eight years.
Wealth destruction probably doesn’t adequately capture what happened in the early stages of the crisis. Wealth was vaporized at a breathtaking, eye-popping speed. American families lost a total of $19.4 trillion (in 2010 dollars) in household wealth from June 2007 to March 2009, when the stimulus started to take hold. First it was the housing market, and then it was the housing and the stock market together that tanked. American families lost $6.4 trillion in home value during this period.
Trillions of dollars are sometimes hard to grasp, so think of it this way: One complete house (at 2008 prices) was lost every 1.7 seconds during the Great Wealth Destruction. And this doesn’t even count what happened to American families’ rainy day funds and retirement savings.
The story of the Great Recession unfolded very quickly after that. The drop in home values meant that fewer people wanted to build and buy new homes, putting a lot of construction workers out of work. And the drop in home values put many borrowers underwater, meaning they owed more on their mortgage than their house was worth, precipitating a massive wave in foreclosures. This ultimately threatened to bring down the entire U.S. financial system but it also tightened credit such that businesses couldn’t expand, even if they wanted to. Jobs disappeared across all industries, not just in construction, leading to the highest unemployment rate in almost 30 years.
This crisis did not fall from the sky. We saw it coming. My colleague Scott Lilly and I pointed out in 2004 that the economic trends that ailed the economy and led to the sharp rise in household debt were unsustainable. American workers lived through the weakest labor market since the Great Depression after the previous recession ended in November 2001. Yet prices for key household items such as health care, energy, transportation, food, and housing rose, often at runaway speed. American families only managed to pay their bills by borrowing on their credit cards, for large consumer items and on their homes. The massive debt boom was a reflection of the economic squeeze American families were in during the 2000s.
The sad part is that the Great Recession could have been prevented. The George W. Bush administration had several opportunities to seriously address the unfolding crisis.
There were several chances to promote faster growth. The first opportunity came early in 2001 when Congress negotiated a tax bill pushed for by the newly inaugurated president. Rather than shovel enormous amounts of money to the top income earners with a tax bill that cost well more than $1 trillion in the first 10 years, the money could have been used to stimulate economic growth by giving middle-class families a boost and by investing in needed infrastructure such as new energy sources.
OK, so policymakers missed the boat on this one. But Congress had another chance to address the looming crisis when President Bush pushed for another tax bill in 2003. This one was intended to stimulate growth through cuts in taxes for dividends and capital gains, among other things. The bill was derided by many economists as a woefully ineffective way to turn the economy around and to bring stronger job growth to American families. And true to this prediction, the years after the bill’s passage were marked with job growth that was about one-third below its long-term average.
And there were opportunities to start to tackle high costs, particularly in health care and energy. The Medicare Modernization Act of 2003, a key piece of the Bush policy agenda, which added prescription drug benefits to Medicare, explicitly excluded two mechanisms that could have helped lower costs—allowing drug reimportation from other, cheaper countries such as Canada, and permitting Medicare to use its market power to negotiate lower drug prices.
In addition, several versions of an energy bill that would have brought more alternative fuels and promoted greater energy efficiency were negotiated but never passed—in large measure because President Bush either did not make energy reform his priority or because he directly opposed the upfront costs necessary to invest in the country’s energy future.
We are now climbing out of the hole that the failed economic policies of the Bush administration created. That’s why the more proper name for the Great Recession should be the Bush Recession.
Indeed, President Obama took office and led the economy out of recession in June 2009, though much more remains to be done. Household wealth has been growing, at least outside of housing wealth, because the stock market has been doing OK. American families are now down only $12.8 trillion from where they were in June 2007. Job growth has come back for more than a year but we still have more than 7 million fewer jobs than at the start of the recession in December 2007. And the unemployment rate has been gradually declining from a high of 10 percent at the end of 2009.
Wealth would be much lower and unemployment much higher without the constant policy attention of the Obama administration. The administration took massive quick steps necessary to prevent another Great Depression with the passage of the stimulus packet in early 2009. It also paid constant attention to economic growth and the labor market with support for small businesses that couldn’t get credit; with a health insurance bill that promises to lower health care inflation; with a financial regulatory reform bill that will shine some lights on the shadier players in the financial market; with a push for an energy bill that would have promoted alternative fuels and increased energy savings; and with extended unemployment benefits for those caught in the mess due to no fault of their own.
As bad as the Great Recession was, it could have been much worse, even though that seems hard to believe. Remember that when conservatives try to run from the record of the Bush administration’s failed economic policies while also trying to reintroduce the very same failed policies. The consequences of conservatism were dire then and would be again.
Christian E. Weller is a Senior Fellow at the Center for American Progress and associate professor, Department of Public Policy and Public Affairs, University of Massachusetts Boston.
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