But the broader economic crisis went on much longer. Unemployment rose to almost 10 percent, then came down with painful slowness; it didn’t get back to 5 percent until seven years after Lehman’s fall. Why didn’t rapid financial recovery lead to rapid economic recovery?
At a basic level, the answer is that the financial crisis was only one symptom of a bigger problem: the collapse of a gigantic housing bubble. The bursting bubble exerted a powerful downdraft on the economy.
What the crisis called for, then, were policies to boost spending, to offset the effects of the housing bust. But the normal response, cutting interest rates, wasn’t available, because rates were already near zero. What we needed, instead, was fiscal stimulus: increased government outlays and tax cuts for lower- and middle-income families.
And we did indeed get substantial stimulus. But it wasn’t big enough, and even more important, it faded out much too fast.
Why did the response to a depressed economy fall short? Some officials failed to see the need for stronger policies. When Christina Romer, the administration’s top economist, argued for more stimulus, Tim Geithner, the Treasury secretary, dismissed it as “sugar.”
But the most important reason the great slump lasted so long was scorched-earth Republican opposition to anything and everything that might have helped offset the fallout from the housing bust.
Now, Republicans claimed that their opposition to anything that might limit mass unemployment was driven by a deep commitment to fiscal responsibility. But this was complete hypocrisy.
Anyway, the events of the past two years have made the reality of what happened crystal clear. The very same politicians who piously declared that America couldn’t afford to spend money supporting jobs in the face of a deep, prolonged slump just rammed through a huge, deficit-exploding tax cut for corporations and the wealthy even though the economy is currently near full employment. No, they haven’t abandoned their commitment to fiscal responsibility; they never cared about deficits in the first place.
Policy failed because cynical, bad-faith Republicans were willing to sacrifice millions of jobs rather than let anything good happen to the economy while a Democrat sat in the White House.
Writes for The New York Times.