The Great Recession (UXL) The recession that began in December 2007 is often called the Great Recession, indicating that, while nowhere near the magnitude of the Great Depression, the downturn was catastrophic in its own right. From December 2007 to June 2009, when the NBER declared the recession officially over, GDP decreased by about 5 percent, the deepest Page 330 Top of Articlecontraction since the Depression. The unemployment rate doubled from 5 percent in December 2007 to 10 percent in October 2010. When Barack Obama took office in January 2009, he enacted the American Recovery and Reinvestment Act, an $831 billion stimulus package in the spirit of John Maynard Keynes. Its goals were to preserve and create jobs and promote economic recovery; to provide long-term economic benefits by assisting those hardest hit by the recession; to invest in technology, health, transportation, and other infrastructure; and to stabilize state and local government budgets. The roots of the crisis lay in a housing bubble, an unsustainably huge rise in real estate prices. In 2001, the median price of a home in the United States was $175,000. By 2006, it had jumped to $247,000. Mortgage companies fueled the increased demand by offering lowinterest home loans to people with poor financial histories and high debt levels, a tactic called subprime lending. Many of these loans were adjustable-rate mortgages (ARMs), which feature very low interest rates at the beginning with a later spike in rate. In the financial world, meanwhile, investment banks eagerly bought and sold financial assets called securities on the basis of the value of these mortgages; so these were called mortgage-backed securities. Then, in 2006, home prices began to decline. Many homeowners with ARMs could no longer afford to make their mortgage payments and had their homes repossessed by the lenders, a process called foreclosure. Falling home prices and mortgage foreclosures caused the value of mortgage-backed securities to plummet. Banks that had invested heavily in these securities began to fail. The government, under President George W. Bush, helped, or bailed out, some of the largest of the troubled banks so they could remain in operation, but the financial crisis continued. The week this bailout was announced, the stock market dropped more than it had in any single week during the Great Depression. A banker explains a mortgage loan application to a couple looking to buy a new home. Mortgage companies contributed to the housing bubble of the mid 2000s by offering low-interest home loans to people with poor financial histories and high debt levels, a tactic called subprime lending. TED FOXX/ALAMY
The rate of home foreclosures jumped when the effects of the Great Recession of 2007 2009 caused some mortgage holders to default, or stop paying, on their loans. KRISTOFFER TRIPPLAAR/ALAMY The stimulus package In an attempt to jump-start the economy, Congress passed American Recovery and Reinvestment Act (AARA), usually called the stimulus package, in early 2009. Its stated goals were: 1. To preserve and create jobs and promote economic recovery. 2. To assist those most impacted by the recession. 3. To provide investments needed to increase economic efficiency by spurring technological advances in science and health. 4. To invest in transportation, environmental protection, and other infrastructure that will provide long- term economic benefits. 5. To stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. After the stimulus funds themselves had been spent, the government cut payroll taxes, extended eligibility periods for unemployment benefits, and took other actions that cost about $675 billion.
Tax incentives accounted for 50 percent of total spending. Income tax rates were not lowered, but individuals received various tax cuts and credits, including payroll, child, college, and homeowner credits. Business tax incentives included allowing companies to use current losses to offset earlier profits and extending renewable energy rebates. State and local governments received 12 percent of total stimulus funds, almost all of it to avoid cuts to education and Medicaid, a program that provides health insurance to lowincome people. Another 20 percent of the stimulus money aided individuals affected by the recession, providing unemployment benefit extensions, increases in food stamps, and extra payments to those receiving Social Security or disability. Most of the remaining aid went to infrastructure programs that would create employment. Road and highway construction was the biggest single part of the act. Public transportation improvements and water, environment, and public lands projects created jobs as well. The stimulus package also included funding for various projects, such as information technology improvements, investments in energy efficiency and renewable energy, and scientific research. A sluggish recovery The effects of the stimulus package are difficult to determine. First, it is impossible to know what would have happened if the stimulus had not been enacted. Second, some effects may have stemmed from monetary policies, not fiscal ones. The NBER, which officially determines the start and end dates of recessions, announced in September 2010 that the recession had ended in June 2009, four months after the stimulus was enacted. In other words, the economy was beginning to improve. Yet the pace of the recovery remained sluggish for several years after the recession ended, and many Americans believe that the recovery has passed them by. In an October 2014 poll, only one in five Americans rated the country's economic condition as good or excellent. Unemployment, for example, inched down only slowly. It peaked at 10 percent four months after the recession had officially ended, and dropped only 1 percentage point per year thereafter. In March 2015, the unemployment rate was 5.5 percent. In contrast, the unemployment rate before the recession began was 4.4 percent. Furthermore, the jobs people have found have often been less satisfactory than the ones they lost. The National Employment Law Project estimated as of April 2014 that there were 2 million fewer mid-and high-wage jobs in the economy than before the recession and 1.85 million more low-wage jobs. Low-wage jobs constituted 22 percent of jobs lost during the recession and 44 percent of jobs gained afterwards; 37 percent of jobs lost were midwage, but only 26 percent of post-recovery growth was mid-range jobs; and high wage jobs constituted 41 percent of recession losses and 30 percent of recovery growth. Wage growth has also been slow since the recession's end and wealth inequality has increased. Before the recession, upper-income families had a median net worth 4.5 times greater than that of a middle-income family; after the recession, the net worth of upper-income families was 6.6 times greater. American Reinvestment and Recovery Act (ARRA) Programs by Functional Categories Office of Management and Budget, Agency Financial and Activity Reports; Department of the Treasury, Office of Tax Analysis, based on the FY2013 Mid-Session
Review. The Economic Impact of the American Recovery and Reinvestment Act Five Years Later. Executive Office of the President, Council of Economic Advisers, February 2014. http://www.whitehouse.gov/sites/default/files/docs/cea_arra_report.pdf (accessed December 2, 2014). CENGAGE LEARNING Note: Percentages may not add to 100 due to rounding. Data does not include Alternative Minimum Tax Relief. Real Median Household Income in the United States Real Median Household Income in the United States. Federal Reserve Economic Data (FRED), Federal
Reserve Bank of St. Louis, September 30, 2014. http://research.stlouisfed.org/fred2/series/mehoinusa672n (accessed December 2, 2014). CENGAGE LEARNING Note: Real household Income Is adjusted annually for Inflation using the Consumer Price Index based on the 2013 value of the dollar. GDP growth has also been slow, averaging about 2.5 percent a year. The Congressional Budget Office (CBO) reported in November 2012 that since the recession ended, GDP had increased at less than half the rate shown during other recoveries. The main reason, it concluded, was because of very slow growth in potential GDP, the amount of GDP that would be generated if the economy were employing resources most efficiently. In other words, the recovery was slow because the economy was slowing down anyway, and had been since the 1960s. In addition, the CBO stated, aggregate demand remained low. The president's Council of Economic Advisers contends that the stimulus package prevented a far worse economic scenario. It estimates that the stimulus and other spending raised GDP by about 2.5 percent and created or saved more than 2.3 million jobs a year through 2012. Most economists agree. Before the plan was enacted, almost four hundred economists had signed a letter publicly supporting it, whereas two hundred had signed one opposing it. Three years after the stimulus package was enacted, the economists participating in the University of Chicago IGM Forum were asked whether its benefits would exceed its costs; twenty-five said yes, two said no, and ten were uncertain. Four out of five believed that the stimulus package had reduced unemployment. A 2011 Washington Post review of economic studies of the stimulus found that six economists had concluded that the stimulus had had significant positive effects, and three concluded that its effects were minimal or nonexistent. By the end of 2014, economic indicators were looking better than they had since the recession's beginning. The Bureau of Economic Analysis reported that GDP had increased at an impressive annual rate of 5 percent in the third quarter of the year. Unemployment, at 5.6 percent, was the lowest since July 2008. And, according to researchers, consumer confidence was at its highest since January 2007, before the recession began. "Fiscal Policy." UXL Money: Making Sense of Economics and Personal Finance. Julia Garbus. Ed. Shawn Corridor. Vol. 2: Macroeconomics and International Trade. Farmington Hills, MI: UXL, 2015. 303-339. Web. 18 Aug. 2015. URL http://go.galegroup.com/ps/i.do?id=gale%7ccx3626800017&v=2.1&u=oreg77062&it=r &p=gvrl&sw=w&asid=ab9c0d11af9a7e174172d1a02d544a5d