[Editor’s note: A new and timely report from the North Carolina Budget and Tax Center (“Lessons for next time: How North Carolina can prepare for an economic downturn”), explores some of the policy prescriptions that worked well during the Great Recession and what state leaders should be doing now to prepare for the next downturn. The following is from the introduction.]
The start of the Great Recession, and the collapse of financial markets in the fall of 2008, is more than a decade behind us, yet its impact still reverberates through North Carolina communities and households. Policymakers should use the lessons learned from the Great Recession to prepare now to protect North Carolina’s people and communities from the next economic downturn.
North Carolina experienced one of the sharpest drops in employment during the Great Recession of any state in the country. From December 2007 to the absolute lowest employment level in February 2010, North Carolina saw a decline of 325,000 jobs, or roughly 8 percent of total employment. While North Carolina has since recovered to pre-Recession employment numbers of jobs, the state has never truly climbed out of the hold that the economic collapse left behind.
The recovery that officially began in July 2009 has been slow to produce the level of job growth necessary to keep labor force participation high, to generate broad-based wage gains, and to lift people out of poverty. The scars of the Great Recession are likely to be long-lasting and have clearly disrupted the well-being of many North Carolinians, with median household income still below pre-Recession levels, for example. To minimize the harms in the moment of a downturn and to reduce barriers to long-term growth prospects, public policy has a critical role to play.
It is unclear when the next economic downturn will begin, but the unprecedented length of the current expansion suggests that policymakers should prepare now for the ways in which economic shocks could disrupt the well-being of North Carolina families and the economy as a whole.
Lessons from the response to the Great Recession should inform state policymakers’ efforts. And specific systems — like the state’s unemployment insurance program, delivery of Food and Nutrition Services, budgeting practices and infrastructure investments — should be strengthened in North Carolina now. In so doing, policymakers can ensure that timely, effective policies can counterbalance the potential harmful effects of a downturn on every community’s ability to thrive.
Policy measures to fight the Great Recession worked well — before they were abandoned
Now that time has passed, there is a significant body of academic research documenting the specific and the broad policy responses to the Great Recession, primarily at the federal level.
Using Moody’s macroeconomic model, economists Alan Blinder and Mark Zandi have summarized their findings regarding what could have happened in the U.S. economy without the policy responses of late 2008 and early 2009 as follows:
- “The peak-to-trough decline in real domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
- the economy would have contracted for more than three years, more than twice as long as it did;
- more than 17 million jobs would have been lost, about twice the actual number.”
Researchers have noted that among the most effective policy decisions in the aftermath of the downturn were expansion of emergency unemployment benefits, additional food assistance payments, and federal aid to states that helped to balance budgets without deeper spending cuts.
While the response worked well in the depths of the recession, the pulling back on this response too early contributed to a slower recovery. The result was that state budgets across the country, including in North Carolina, still weren’t able to balance due to depressed revenues when federal aid to states went away and deep cuts were needed. In addition, households lost critical supports that helped them make ends meet, stay connected to the labor market, and minimize the loss of income and assets.
Future responses should be automatic and durable to achieve greatest benefits for North Carolinians.
A thorough review of the policy response has many lessons for policymakers at the federal and state level, including the early missed opportunities that failed to prevent economic shocks at the outset. Two broad lessons from the Great Recession that matter for state policymaking should be emphasized—the need for both quick response and commitment to maintain public investments and policy interventions until the economy is in full growth mode.
Alexandra Forter Sirota is the Director of the North Carolina Budget and Tax Center.