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The damage done by recessions and how to respond

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From December 2007 to June 2009, the United States experienced the longest and most-severe recession since World War II. Although the Great Recession was particularly damaging, recessions occur frequently and are devastating to workers, families, and the overall economy. Historically, the United States has responded to these downturns with a combination of monetary and fiscal policies, the majority of which are discretionary. In this paper, we discuss some of the concerns about relying too much on discretionary policy, highlighting opportunities to make greater use of automatic fiscal stabilization. Automatic stabilizers are designed to expand during an economic downturn and contract during an expansion—providing timely and temporary fiscal stimulus. This paper assesses the various policy responses available to the federal government and argues that when well designed, automatic stabilizers can be an effective part of the policy tool kit for responding to recessions.

Ryan Nunn

Assistant Vice President for Applied Research in Community Development - Federal Reserve Bank of Minneapolis

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