ECONOMIC FACTS | MAY 2016

Nine Facts about the Great Recession and

Tools for Fighting the Next Downturn

Diane Whitmore Schanzenbach, Ryan Nunn, Lauren Bauer, David Boddy, and Greg Nantz

W W W. H A M I LT O N P R O J E C T. O R G
ACKNOWLEDGMENTS

The Hamilton Project is grateful to Marianne Bitler, Gerald Cohen,

Christine Dobridge, David Dreyer, Jonas Fisher, Bill Gale, Hilary
Hoynes, Kriston McIntosh, Joshua Montes, and Meeghan Prunty
for insightful comments and discussions. The Project is also
grateful to Jacob Bochner and Megan Mumford for excellent
research assistance.

MISSION STATEMENT

The Hamilton Project seeks to advance America’s promise of

opportunity, prosperity, and growth. The Project’s economic
strategy reflects a judgment that long-term prosperity is best
achieved by fostering economic growth and broad participation
in that growth, by enhancing individual economic security, and by
embracing a role for effective government in making needed public
investments. We believe that today’s increasingly competitive
global economy requires public policy ideas commensurate with
the challenges of the 21st century. Our strategy calls for combining
increased public investments in key growth-enhancing areas, a
secure social safety net, and fiscal discipline. In that framework,
the Project puts forward innovative proposals from leading
economic thinkers — based on credible evidence and experience,
not ideology or doctrine — to introduce new and effective policy
options into the national debate.

The Project is named after Alexander Hamilton, the nation’s

first treasury secretary, who laid the foundation for the modern
American economy. Consistent with the guiding principles of
the Project, Hamilton stood for sound fiscal policy, believed
that broad-based opportunity for advancement would drive
American economic growth, and recognized that “prudent aids
and encouragements on the part of government” are necessary to
enhance and guide market forces.
 Nine Facts about the Great Recession and
Tools for Fighting the Next Downturn
Diane Whitmore Schanzenbach, Ryan Nunn, Lauren Bauer, David Boddy, and Greg Nantz

Introduction
Between December 2007 and June 2009 the United States experienced the most severe recession
in the postwar period. The over 4 percent decline in gross domestic product (GDP) was only reversed more than three
years after the beginning of the recession. During the worst part of the Great Recession, virtually every segment of the
U.S. economy was adversely affected. Employment losses were severe, but also unevenly distributed: men, the young,
and the less educated suffered disproportionately in the recession’s aftermath.

Before the Great Recession, macroeconomists had chronicled a Great Moderation—a reduction in the volatility of the
business cycle—achieved by the judicious use of monetary policy (Clarida, Galí, and Gertler 2000; Galí and Gambetti
2009). Now, in the wake of the most severe downturn and the slowest recovery in the postwar period, it seems that
such talk was premature.

Given the massive human cost of recessions, it is incumbent upon policy makers to assess the policy tools at their
disposal and identify those that are most effective at hastening economic recovery during a downturn. In this document
we describe how different groups of workers were affected by the Great Recession, what works in fiscal stimulus, what
could be done differently in future recessions, and the fiscal preparedness of states for the next downturn.

There are two sets of policy tools used to foster recovery following recessions: monetary policy and fiscal policy.
Monetary policy, consisting of actions taken by the Federal Reserve, is used to keep interest rates low and reduce
unemployment during and after a recession. Fiscal policy includes various forms of government spending and tax cuts
enacted by Congress. Following a recession, both sets of policy tools can be used to increase demand, thereby raising
output and more quickly returning the economy to prerecession conditions.

To be most effective, it is crucial that stimulus be expeditious. In the Great Recession, a portion of the fiscal policy
response occurred automatically within preexisting programs. These programs are called “automatic stabilizers” because
they provide immediate stimulus during a recession without requiring action from Congress. For this reason, automatic
stabilizers like unemployment insurance (UI), the Supplemental Nutrition Assistance Program (SNAP, formerly Food
Stamps), and Medicaid—in addition to automatic stabilization associated with tax revenue—are particularly valuable.

The Hamilton Project • Brookings i

Introduction continued from page i

As soon as a recession arrives, participation in these programs TANF plays a role in alleviating deep poverty, it is not currently
expands as incomes fall and unemployment rises—and in some structured to respond effectively to cyclical poverty variation or
cases, participation increases because of automatically reduced to act as an automatic stabilizer.
eligibility requirements for participants. The result is that
additional funds are automatically disbursed (or taxes reduced), The fiscal stimulus in ARRA is widely believed to have reduced
immediately providing fiscal stimulus. The United States makes the severity of the Great Recession (Chodorow-Reich et al.
considerable use of automatic stabilizers, which amounted to 2012; CBO 2015). By the CBO’s estimate, the fiscal stimulus
about 2 percentage points of GDP during the depths of the Great bill caused GDP to be 0.4 to 2.3 percent higher in 2011 than it
Recession (Congressional Budget Office [CBO] 2016a). otherwise would have been (CBO 2015). But which components
of the fiscal stimulus were most useful? Stimulus aimed at
Monetary policy makers were also quick to react. As the Great low-income or otherwise cash-constrained households tends
Recession began and GDP and employment plunged, the Federal to be more effective, whereas business tax cuts tend to be less
Reserve reduced the federal funds rate. (The federal funds rate is effective (Whalen and Reichling 2015). By some calculations,
the interest rate that banks charge each other on a particular kind government spending is typically a more effective stimulus than
of overnight loan.) This conventional monetary policy action tax cuts, partially because workers tend to spend only a fraction
aimed to lower borrowing costs for individuals and businesses, of stimulus provided through the tax system. Across all stimulus
thereby encouraging both immediate consumption and types, it is widely believed that fiscal stimulus is more effective
investment. However, the ongoing very low federal funds rate— during recessions and less effective during expansions (Auerbach
which cannot be lowered much farther—and the severity of the and Gorodnichenko 2012; Fazzari, Morley, and Panovska 2014),
Great Recession prompted an increased focus on fiscal policy as a likely because downturns are characterized by slack in both
recession-fighting tool. labor and capital markets (i.e., available resources are not fully
employed), allowing fiscal stimulus to increase total output.
Fiscal stimulus that requires congressional action takes longer.
In some cases it may take a considerable amount of time to Despite all of the monetary and fiscal actions taken to mitigate
observe that a recession has begun, debate the appropriate the severity of the Great Recession, output has still not returned
legislative response, pass legislation, disburse funds to states and to either its prerecession trend or to potential output (CBO 2016b).
individuals, and finally spend authorized funds. Such lags are Unemployment has only recently recovered to a level close to
perhaps inevitable, but quick delivery of stimulus is preferable the prerecession rate, and other measures of labor market slack,
for both the economy and the affected workers and families. The such as the fraction of workers who work part time for economic
American Recovery and Reinvestment Act of 2009 (ARRA) was reasons, remain elevated (Bureau of Labor Statistics [BLS] 2016a).
a major vehicle for such fiscal stimulus, authorizing spending on In addition, states are not adequately prepared for the next
infrastructure, health care, and education; expanding automatic recession. In most states, rainy-day funds remain insufficient to
stabilizers; and making various tax cuts. cope with a large, unexpected decline in tax revenues. These states
will either need to cut crucial government services—hurting both
With unemployment and poverty spiking, two major state residents and the broader economy—or rely on the federal
programs—UI and Temporary Assistance for Needy Families government for support to maintain their budgets.
(TANF)—responded in starkly different ways. UI claims shot up
in response to the increasing number of the newly unemployed, A founding principle of The Hamilton Project’s economic
buffering eligible workers against earnings losses. Not all of strategy is that long-term prosperity is best achieved by fostering
the newly unemployed were eligible for UI, but the program economic growth and broad participation in that growth. To that
was broadly successful in achieving its mission. By contrast, end, The Hamilton Project offers the following nine facts about
the caseload of TANF—the successor to Aid to Families with the Great Recession and the kinds of fiscal stimulus that can help
Dependent Children—barely increased as poverty grew. Though mitigate the severity of future recessions.

ii Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
 Table of Contents

INTRODUCTION i

FACTS
1. The Great Recession was unprecedented in the postwar period for its severity
and duration. 1
2. Employment losses in the Great Recession were greater among men and the young. 2
3. Fiscal stimulus tempered the length and the depth of the Great Recession. 3
4. The federal funds rate is near historical lows and cannot be reduced much farther. 4
5. Many spending programs provided highly effective stimulus during the Great Recession. 6
6. Well-targeted tax cuts can stimulate the economy. 8
7. Automatic stabilizers generate substantial, well-timed stimulus. 9
8. Safety net programs varied widely in their effectiveness as automatic stabilizers
during the Great Recession. 10
9. Insufficiently financed rainy-day funds have left the majority of states unprepared
for the next recession. 12

TECHNICAL APPENDIX 13

REFERENCES 14

SELECTED HAMILTON PROJECT PAPERS 16

The Hamilton Project • Brookings iii

iv Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
 1. The Great Recession was unprecedented in the
postwar period for its severity and duration.

Between December 2007 and June 2009, the United States structural changes in the economy as well as cyclical factors
experienced the most severe recession in the postwar period. (Kearney and Hershbein 2015).
Recessions are conventionally measured by declines in GDP,
which measures overall economic activity and is defined as During the Great Recession, the nation’s actual GDP
the value of the economy’s total output of goods and services. contracted by more than 4 percent. How much of a reduction
Figure 1a compares the depth and duration of the Great was this relative to the economy’s hypothetical capacity, or
Recession with the four most recent recessions, plotting the “potential GDP”? Potential GDP refers to the economy’s
changes in GDP from the first quarter of the recession to the maximum sustainable output, which mirrors GDP under
quarter when GDP was the lowest relative to the beginning normal conditions and to which actual GDP is expected
of the recession (bold lines) and the economy’s subsequent to return quickly after a downturn. Today—more than six
recoveries (light lines). Not only was the Great Recession years after the recession ended—economic output remains
(grey) deeper than any recent recession, but it took nearly substantially below potential GDP. As shown in figure 1b,
four years for the economy to regain the prerecession GDP the gap between actual and potential GDP reached its widest
level—twice as long as for the 1981–82 recession. As discussed point in the third quarter of 2009, when the economy fell short
in The Hamilton Project jobs gap analysis, the labor market of potential GDP by $1.2 trillion in constant 2015 dollars, or 7
was slower to recover following the Great Recession than it percent of potential GDP. The financial stabilization and fiscal
was after previous downturns (Kearney and Hershbein 2015), stimulus policies enacted during the recession helped mitigate
and still remains weaker in May 2016 than it was before the severity of the downturn (Blinder and Zandi 2015), but
the recession (The Hamilton Project n.d.). Th is co ntinues a the gap between actual and potential GDP, at $410 billion
pattern in which successive recessions have been followed by in constant 2015 dollars, still had not closed by the fourth
more-prolonged job-market recoveries—reflecting long-term quarter of 2015.

FIGURE 1A. FIGURE 1B.

Depth and Duration of the Five Potential GDP vs. Actual GDP, 2005–15
Most-Recent Recessions
More than six years after the Great Recession ended, GDP remains about $400 billion below its potential.

0 19
Recession
$410
–1 billion
Percent change in real GDP

18
Trillions of 2015 dollars

Potential GDP

–2
17
Recessions:
Actual GDP
–3 1980
1981–82
1990–91 16
–4 2001
2007–09

–5 15
0 1 2 3 4 2005 2007 2009 2011 2013 2015
Years since prerecession GDP peak

Sources: Bureau of Economic Analysis 2016; CBO 2016b; National Bureau of Economic Research n.d.
Note: All values are seasonally adjusted. Actual GDP in figure 1b is smoothed using a three-quarter moving average. Gap between actual and potential GDP
($410 billion) is in constant 2015 dollars.

The Hamilton Project • Brookings 1

 2. Employment losses in the Great Recession were
greater among men and the young.

The Great Recession sharply reduced employment for many share fell the farthest for men without a high school degree; note
workers in the United States, but these reductions were that men tend to suffer more during recessions largely because
concentrated among men, younger workers, and workers with they tend to be employed in industries that are more cyclical
lower levels of education. This may be the result of a so-called job (Hoynes, Miller, and Schaller 2012).
ladder that renders low-skilled workers—and young workers—
disproportionately sensitive to the business cycle (Barnichon Figure 2b shows the change in the share of the population
and Zylberberg 2014; Beaudry, Green, and Sand 2013). Figure 2a employed for different age groups, from December 2007 to
shows the change in the employed share of the population aged December 2009. The steep decline captured by the leftmost bars
25 and older by education level and gender, from just before the in figure 2b (corresponding to ages 20–24) highlights the impact
recession began (December 2007) to December 2009—roughly of the recession on young people. This pattern partly reflects the
the trough of the labor market. Employment fell more sharply option that young people possess to acquire education rather
for workers with low levels of education, though women with than participate in a weak labor market—an alternative less
less than a high school degree saw only a 3.4 percent loss in readily available to middle-aged workers. This pattern may also
employment. Men tended to experience steeper declines than be attributable to the tendency of firms to lay off inexperienced
women, within both education and age groups. The employment workers before those in mid-career.

FIGURE 2A. FIGURE 2B.

Percent Change in the Share of the Population Percent Change in the Share of the Population
Employed, December 2007 to December Employed, December 2007 to December
2009, by Gender and Educational Attainment 2009, by Gender and Age Group
The employment share of men with less than a high school degree fell by more than 13 percent, while the employment share of
men with a four-year degree fell only 4.3 percent.

Less
Less than High
than High school Some
school Some Bachelor
Bachelor
high
high school degree,
school degree, college, Associate degree
college, Associate degree
degree nono
degree degree
college nono
college degree degree
degree oror
more
more 20–24
20–24 25–54
25–54 55–59
55–59 60–64
60–64 65+
65+
00 55

–2–2
00
–4–4
Percent change
Percent change

–6–6
–5–5
–8–8

–10
–10 –10
–10

–12
–12

–14
–14 –15
–15

Men
Men Women
Women Men
Men Women
Women

Source: BLS 2016b.

Note: The figure shows the percent changes in the employment-to-population ratio for each group. Employment is defined as having worked any amount of
time during the BLS interview period. Figure 2a is restricted to workers 25 and older.

2 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
 3. Fiscal stimulus tempered the length and the depth
of the Great Recession.

Policy makers rely on two sets of tools to foster recovery During the Great Recession, fiscal policy played an important
following a recession. Monetary policy, consisting of actions role in the economic recovery (figure 3). The purple line shows
taken by the Federal Reserve, is used to keep interest rates the actual path of GDP: note that the economy reached its low
low and reduce unemployment during and after a recession. point in the second quarter of 2009 and then began growing
Fiscal policy includes various forms of government spending again. Blinder and Zandi (2015) estimate that, absent the fiscal
and tax cuts enacted by Congress. Following a recession, stimulus, the economy would have continued to contract until
both sets of policies can be used to increase demand, thereby the fourth quarter of 2009, to $15.5 trillion in output annually
raising output and more quickly returning the economy to (in constant 2015 dollars), and would not have reached
prerecession conditions. prerecession levels until the second quarter of 2012—a year
after it actually did.

FIGURE 3.

Real GDP under Different Policy Scenarios, 2008–15

Without a discretionary fiscal response to the recession, GDP in 2011 would have been half a trillion dollars smaller.

18.0

17.5
Trillions of 2015 dollars

Actual response
17.0

No discretionary
16.5
fiscal stimulus

16.0

15.5

15.0
2008 2009 2010 2011 2012 2013 2014 2015

Source: Blinder and Zandi 2015.

Note: Values are seasonally adjusted. Years correspond to the first quarter of each year. Data extend from the first quarter of 2008 to the
second quarter of 2015.

The Hamilton Project • Brookings 3

 4. The federal funds rate is near historical lows and
cannot be reduced much farther.

As the central banking institution of the United States, the the economy, encouraging businesses to invest and employ
Federal Reserve has two primary responsibilities, often more workers and encouraging consumers to spend more,
referred to as its dual mandate: (1) to maintain price stability consequently lowering the unemployment rate.
and (2) to help the economy remain near maximum sustainable
employment. As shown in figure 4, the unemployment rate As shown in figure 4, after the Federal Reserve lowers the
rises as the economy contracts: in the past 45 years, as the federal funds rate, the unemployment rate tends to drop,
economy has gone through each recession, unemployment albeit with a lag. When economic conditions improve, the
has increased on average by 2.5 percentage points. The Federal Federal Reserve raises the federal funds rate again to forestall
Reserve responds to these changes in the labor market by using inflation, which occurs when the economy overheats and
open-market operations, which consist of the acquisition and prices rise too rapidly.
sale of securities, to lower the federal funds rate (the interest
The unemployment rate remained elevated well after the
rate at which institutions lend deposits at the Federal Reserve
end of the Great Recession, and the Federal Reserve has
to other institutions overnight) and recently to expand its
consequently kept the federal funds rate close to zero for
balance sheet. When economic conditions worsen, a reduction
some time, while also pursuing other expansionary monetary
in the federal funds rate lowers interest rates throughout

FIGURE 4.

Federal Funds Rate and Unemployment Rate, 1971–2016

Since the Great Recession the quarterly unemployment rate has fallen by half—from a peak of 9.9 percent to a low of 5.0
percent—while the federal funds rate remains near all-time lows, at between 0.25 and 0.5 percent.

18
Recession
16

14

12
Percent

10
Unemployment rate
8

2
Federal funds rate
0
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Source: Federal Reserve Bank of St. Louis 2016; National Bureau of Economic Research n.d.
Note: The unemployment rate is seasonally adjusted. Years correspond to the first quarter of each year. Data extend from the first quarter of 1971
to the first quarter of 2016.

4 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
policies to encourage economic activity. If another recession
were to occur while the federal funds rate remains near zero,
the Federal Reserve would not have its conventional arsenal
of tools since the federal funds rate cannot be lowered much
farther. It would then have to make do with unconventional
tools to help the economy recover. Given that considerable
uncertainty remains about the effectiveness and costs of
unconventional monetary policies, expansionary fiscal policy
may be an attractive option.

The Hamilton Project • Brookings 5

 5. Many spending programs provided highly effective
stimulus during the Great Recession.

Governments may use fiscal policy—additional government because downturns are characterized by slack in both labor and
spending or tax cuts—to stimulate the economy during a capital markets (i.e., available resources are not fully employed),
recession. A fiscal multiplier is an estimate of the increased thereby allowing fiscal stimulus to increase total output.
output caused by a given increase in government spending or Multipliers are also higher when the spending program or tax cut
reduction in taxes. Any multiplier greater than zero implies that targets lower-income people, who are more likely to spend the
additional government spending (or reduced taxes) adds to total stimulus (Parker et al. 2013; Whalen and Reichling 2015).
output. Fiscal multipliers greater than one indicate an increase
in private-sector output along with an increase in output from Not all spending or tax cuts are created equal, as indicated by
government spending. the variation in fiscal multipliers shown in figure 5 and figure 6.
But during the depths of the recession, each spending multiplier
Although there is disagreement among economists over the exact analyzed by Blinder and Zandi (2015) was greater than one,
size of various fiscal multipliers (see Auerbach, Gale, and Harris indicating that spending on these programs raised output by
[2010] for a discussion), multipliers are generally believed to be more than their costs. Moreover, during the recent recession,
higher during recessions than they are under normal economic every spending multiplier featured here was higher than the tax
conditions when the economy is near its full potential (Auerbach multipliers described in Fact 6. Note that the multipliers reported
and Gorodnichenko 2012; Fazzari, Morley, and Panovska 2014; here are broadly similar to those estimated by CBO (Whalen and
see Ramey and Zubairy 2014 for a dissenting view). This is likely Reichling 2015).

FIGURE 5.

Fiscal Stimulus Multipliers: Spending Programs, 2009 and 2015

During the Great Recession, every dollar of spending on the programs below generated more than a dollar in economic activity.

1.8
1.74
1.6 1.69
1.61 1.57
1.53
1.4
1.41

1.2 1.22
1.13
1.0
1.01

0.8 0.87 0.86

0.6
0.58
0.4

0.2

0.0
Temporary Temporary federal Extension of Increase in Increase in General aid
increase in SNAP financing of UI benefits defense spending infrastructure to state
work-share programs spending governments

2009 Q1 2015 Q1

Source: Blinder and Zandi 2015.

6 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
As shown in figure 5, the most stimulative type of spending
during the recession was a temporary increase in the SNAP
maximum benefit: for every $1 increase in government spending,
total output increased by $1.74. Work-share programs and UI
benefit extensions were also relatively stimulative. Consistent
with economic theory, the programs with the largest multipliers
were those directed at low-income or newly unemployed people.
More recently, as the economy has improved, the multipliers have
diminished. However, the multipliers for SNAP benefits, work-
share programs, and UI benefits remain above one, indicating
that these programs remain effective as forms of stimulus,
generating additional private-sector economic activity.

The Hamilton Project • Brookings 7

 6. Well-targeted tax cuts can stimulate the economy.

Tax cuts can also provide useful stimulus, though multiplier still greater than one. Furthermore, their values were smaller
estimates are generally lower and more variable than estimates than those for spending multipliers (Fact 5) such as increasing
for spending programs. Estimates range from 1.38 for the SNAP benefits and extending UI benefits. Spending programs
Child Tax Credit in the midst of the recession to 0.23 in 2015 or tax cuts that focus on lower-income people tend to have
for accelerated depreciation, which effectively allows firms to higher multipliers because those people are more likely than
postpone tax liabilities. higher-income people to spend what they receive. In addition,
policies such as accelerated depreciation and cuts in the
Although many tax cuts had a fiscal multiplier greater than corporate tax rate, both of which benefit businesses, are less
one during the recession, in 2015 only the multipliers for the stimulative than tax cuts for individuals.
Child Tax Credit and refundable lump sum tax rebate were

FIGURE 6.

Fiscal Stimulus Multipliers: Tax Cuts, 2009 and 2015

Tax cuts targeted to businesses were generally less stimulative than tax cuts targeted to individuals.

1.8

1.6

1.4
1.38
1.27
1.2 1.24 1.22 1.20
1.17

1.0 1.03 1.05 1.02 1.01

0.94
0.87
0.8 0.85
0.79

0.66 0.69
0.6

0.4 0.39
0.34 0.32 0.30 0.29
0.2 0.23

0.0
Child Tax Payroll tax Earned Refundable HIRE Act Payroll tax Personal Nonrefundable Make Corporate Accelerated
Credit holiday for Income lump-sum (job tax holiday for income lump-sum dividend and income (bonus)
(ARRA employees Tax Credit tax rebate credit) employers tax cut tax rebate capital gains tax cut depreciation
Parameters) (ARRA tax cuts
Parameters) permanent

2009 Q1 2015 Q1

Source: Blinder and Zandi 2015.

8 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
 7. Automatic stabilizers generate substantial,
well-timed stimulus.

Fiscal stimulus may take two forms during a recession. The Medicare payroll taxes, taxes on production and imports, and
first is discretionary, when Congress authorizes new tax cuts UI taxes. During expansions, rising incomes generate more tax
or government spending to shore up the economy (as it did revenue; during downturns, taxes are automatically lowered as
with the passage of the ARRA in 2009). However, some fiscal incomes fall. These automatic stabilizers help to moderate the
stimulus also occurs automatically without congressional booms and busts of the business cycle, increasing aggregate
action, making for a quicker response to deteriorating economic demand to offset the negative effects of an economic downturn,
conditions. For example, as employment and income levels and decreasing demand once the economy has recovered.
decline during economic downturns, participation in existing
safety net programs increases and affected households’ tax bills As shown in figure 7, spending on automatic stabilizers varies
fall. According to the CBO, three types of outlays constitute the over the business cycle, expanding promptly during recessions.
large majority of automatic stabilization in federal spending: This stands in contrast to discretionary fiscal policy: by the time
UI benefits, Medicaid benefits, and SNAP benefits (Russek that ARRA was authorized in 2009—five quarters after the start
and Kowalewski 2015). In addition, there are several sources of of the recession—spending on automatic stabilizers had already
revenue that contribute to automatic stabilization: individual grown by 2 percent of GDP.
income taxes, taxes on corporate profits, Social Security and

FIGURE 7.

Federal Deficit or Surplus, With and Without Automatic Stabilizers, 1991–2015

At their largest, automatic stabilizers have provided more than 2 percentage points of additional net spending.

1991 1994 1997 2000 2003 2006 2009 2012 2015

4

2
Percent of potential GDP

–2

–4

–6

–8

–10

Deficit (or surplus) with automatic stabilizers Without automatic stabilizers Recession

Source: CBO 2016a.

The Hamilton Project • Brookings 9

 8.
Safety net programs varied widely in their
effectiveness as automatic stabilizers during the
Great Recession.

Poverty and economic hardship typically increase in For example, the TANF program—which supports poor
recessions and decrease in economic expansions. In families with cash assistance, resources for child care,
particular, households with few resources are especially and work-related services, among others—expanded only
affected by the business cycle. Among poor households, the slightly during the most-recent recession, and the number of
effect of the Great Recession was particularly severe relative families benefiting from the program has now fallen below
to previous recessions. Bitler and Hoynes (2015) estimate its prerecession level, despite the fact that poverty remains
that for a 1 percentage point increase in the unemployment elevated. Figure 8a shows the cumulative change in the
rate, the share of households below 50 percent of the poverty TANF caseload (purple line) during and after the recession
threshold expanded more in the Great Recession than during compared with the cumulative change in the number of
the two recessions of the early 1980s. (The poverty threshold families in poverty (green line); the dramatic split between
in 2015 was $24,036 for a family of four with two children [U.S. the two lines suggests that TANF is failing to reach many
Census Bureau 2016b].) The safety net plays an important role needy families. Unlike SNAP and UI, TANF is largely funded
in mitigating these effects, partly by automatically expanding through a federal block grant with a fixed value, making it less
during economic downturns as eligibility for safety net responsive to changes in need.
programs increases. However, there were stark differences
among safety net programs in their responsiveness to the Other programs, including SNAP and UI, functioned more
Great Recession. effectively as automatic stabilizers during the most-recent

FIGURE 8A. FIGURE 8B.

Change in the Number of Families in Poverty Change in Number of UI Recipients and

and in the TANF Caseload, 2007–14 Number of People Unemployed, 2007–14

TANF was unresponsive to the large increase in poverty during the Great Recession, whereas UI covered many more workers
as unemployment increased.

2.5 2.5 9 9
Change in Change in
Change since 2007 baseline, in millions

Change since 2007 baseline, in millions

Change since 2007 baseline, in millions

Change since 2007 baseline, in millions

number of number of
2.0 2.0 people people
7 7
unemployedunemployed
Change in number
Changeofin number of
1.5 1.5 families in poverty
families in poverty
5 5
Change in Change in
1.0 1.0 number of number of
UI recipientsUI recipients
3 3
Change in Change in
0.5 0.5
TANF Caseload
TANF Caseload
1 1
0.0 0.0
0 0
-0.5 -0.5 –1 –1
2007 20082007200920082010200920112010201220112013201220142013 2014 2007 2008
2007 200920082010200920112010201220112013201220142013 2014

Sources: BLS 2016a; U.S. Census Bureau 2016a; U.S. Department of Health and Human Services 2016; U.S. Department of Labor 2016.
Note: See the technical appendix for details.

10 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
recession (Bitler and Hoynes 2010; Di Maggio and Kermani
2016). Note that during the Great Recession, Congress
increased spending on SNAP and UI above and beyond the
increase that would have occurred automatically. Figure 8b
shows the change in the number of UI recipients compared
with the change in the number of people unemployed. In
contrast to TANF, UI did respond to the economic downturn,
although many workers are either ineligible for or do not
claim UI, and the program consequently covers only a portion
of newly unemployed workers. Despite these limitations,
UI was a powerful automatic stabilizer, with the increase in
UI recipients amounting to more than 7 million during the
economic downturn.

The Hamilton Project • Brookings 11

 9. Insufficiently financed rainy-day funds have left the
majority of states unprepared for the next recession.

Rainy-day funds—also called budget stabilization funds— to poor design: 43 states set arbitrary caps or targets on
are dedicated pools of money set aside by states during good annual contributions to rainy-day funds (The Pew Charitable
times to help them weather economic downturns. Since states Trusts 2015), and in many states these caps and targets on
are generally restricted by law from running budget deficits, contributions are too small. In 2015, six years after the end of
rainy-day funds help them to balance their budgets when tax the Great Recession, only eight states had accumulated enough
revenues fall, without resorting to devastating spending cuts in their rainy-day funds to offset a hypothetical one-year loss
or tax increases at exactly the wrong moment. In each of the of 10 percent or more of their annual expenditures. Given that
previous two recessions, states used their rainy-day funds to average state taxes dropped 11 percent from fiscal year 2008
avoid more than $20 billion in tax increases and/or cuts to to fiscal year 2009, and 21 states experienced losses above 10
services (McNichol 2014). percent (The Nelson A. Rockefeller Institute of Government
n.d.), many states could struggle to absorb a similar loss in the
Nonetheless, many states still struggle to allocate sufficient next recession using rainy-day funds alone.
savings to rainy-day funds. This can be attributed in part

FIGURE 9.

Rainy-Day Fund Balances as a Percent of Expenditures, FY2014

Only eight states have rainy-day funds equivalent to at least 10 percent of annual expenditures.

2.6 0 18 5.1
(no fund) 3.4
0.7 3.0
9.7 1.9
2.0 5.8
51.8 4.3 2.4 3.5
10.4
19 0.9 0 5.3
(no 6.7 4.9 3.1
0.9 4.7 fund) 0
8.0 0
(no fund) 3.3 22.7 5.3
(no fund) 3.9
4.6 0.8
4.9
8.2 3.8 3.1
5.2 0
10.6
6.4
2.0 0.1 4.5
5.2
14.3
212.7

1.3 3.4

No rainy-day fund or no balance 0–5 5 – 10 Greater than 10

Sources: National Association of State Budget Officers (NASBO) 2015; The Pew Charitable Trusts 2014.
Note: Some states without designated rainy-day funds maintain other funds for such purposes. The values reported here follow the reporting conventions
used by NASBO. For additional details, see the technical appendix.

12 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
Technical Appendix

Fact 8. Safety net programs varied widely in their Fact 9. Insufficiently financed rainy-day funds have
effectiveness as automatic stabilizers during the left the majority of states unprepared for the next
Great Recession. recession.
In Figure 8a, TANF caseload data come from the U.S. Some states without designated rainy-day funds maintain
Department of Health and Human Services (2016). The other funds for such purposes. The values reported here
cumulative change is calculated by taking the difference, follow the reporting conventions used by NASBO. However,
for each month, between the total caseload in the current following the classifications used in The Pew Charitable
month and the caseload in January 2007. Annual poverty Trusts’ 2014 report, we have noted those states that do not
estimates come from the U.S. Census Bureau (2016a); values have rainy-day funds. Pew’s definition of rainy-day funds is
for the months between annual estimates are obtained by derived from Yilin Hou’s (2013). To meet the definition of
log-interpolation between January of one year and the next. rainy-day fund, states’ reserve funds must be: (1) enabled by
The cumulative monthly change is calculated by taking the legislation, (2) operate across fiscal years and over the whole
difference, for each month, between the estimate for the economic cycle, and (3) used as government-wide reserves for
current month and January 2007. The cumulative change is general purposes. In the cases of Colorado and Illinois, both
smoothed using a three-month moving average. of which report non-zero values but lack rainy-day funds,
the former maintains mandatory general fund balances but
In Figure 8b, monthly data on the number of people those balances do not respond to changing economic or fiscal
unemployed come from the BLS. A 12-month moving average conditions, and the latter “has a stringent repayment provision
is calculated from the not-seasonally-adjusted data. The that requires all withdrawals from the fund to be repaid in
cumulative monthly change is then taken in the same way as full within the fiscal year, making it, in effect, a working-cash
in Figure 8a. Data on the number of UI recipients come from fund rather than a rainy day fund” (The Pew Charitable Trusts
the U.S. Department of Labor (2016). Because only weekly 2014, 9).
data are available, monthly estimates are approximated
using the average number of UI recipients across the four
weeks preceding the first week of each month. A 12-month
moving average is calculated from the monthly estimates. The
cumulative change is taken in the same way as in Figure 8a.

The Hamilton Project • Brookings 13

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Institution, Washington, DC. 2012-27C, Social Science Research Network, Rochester, NY.
Bitler, Marianne, and Hilary Hoynes. 2015. “Heterogeneity in the Federal Reserve Bank of St. Louis. 2016. “Effective Federal Funds
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The Hamilton Project • Brookings 15

 Selected Hamilton Project Papers on
Preparing for the Next Recession
POLICY PROPOSALS

• “Fiscal Policy Reconsidered” • “Encouraging Work Sharing to Reduce Unemployment”

Alan S. Blinder Katharine G. Abraham and Susan N. Houseman
In the years following the Great Recession, most economists In this policy memo, Katharine G. Abraham and Susan N.
and policymakers agree that fiscal stimulus was crucial to Houseman propose that the federal government subsidize
turning around the faltering economy and helped to save or state work-sharing payments during economic downturns,
create millions of jobs. What economists and policymakers make work sharing a requirement for state unemployment
do not agree about is whether the stimulus should have insurance systems, change federal requirements to modify
been larger, whether it contained the correct mix of tax provisions of state work-sharing plans that may discourage
cuts and targeted government spending, and how it could employer participation, and provide states with adequate
have best been delivered. In a new Hamilton Project policy funding to administer work-sharing programs. This
proposal, Alan Blinder attempts to tackle these questions, proposal, targeted at workers who would otherwise become
using economic theory and recent evidence from the Great unemployed during cyclical downturns, aims to reduce
Recession to discuss how fiscal policy can be better designed the number of layoffs during economic downturns. This
to mitigate the effects of the next economic downturn. proposal is chapter twelve of The Hamilton Project’s Policies
to Address Poverty in America, and a segment in Improving
• “Strengthening Temporary Assistance for Needy Families” Safety Net and Work Support.
Marianne P. Bitler and Hilary W. Hoynes
The experience of the Great Recession reveals important
holes in the safety net. In particular, the central cash- ECONOMIC ANALYSIS
assistance program in the United States, Temporary
Assistance for Needy Families (TANF), is failing to reach • “The Hamilton Project’s Jobs Gap Analysis: An Historical
many poor families. In addition, the program does not Perspective”
automatically expand during economic downturns, when Brad Hershbein and Melissa S. Kearney
the need for the program is likely greatest and when In this Hamilton Project economic analysis, Brad Hershbein
additional consumer spending would be particularly helpful. and Melissa Kearney review the size of the “jobs gap,” or
To strengthen TANF, Marianne Bitler and Hilary Hoynes the number of jobs that the U.S. economy needs in order to
propose reforms to expand both the program’s reach and return to prerecession employment levels while accounting
its responsiveness to cyclical downturns. They also propose for changes in the population. They then compare the most
ways to improve its transparency, which will help researchers recent jobs gap to the historical jobs gaps that followed the
and policymakers understand how the program works, who three prior recessions.
it supports, and how effectively it meets its goals.

• “Modernizing SNAP Benefits”

James P. Ziliak
The Supplemental Nutrition Assistance Program (SNAP)
provides assistance to households that lack food security,
with benefit allotments determined by the USDA’s Thrifty
Food Plan (TFP). However, the assumptions underlying the
TFP are based on increasingly unrealistic assumptions about
food preferences, time availability, and prices faced by many
SNAP recipients. As a result, SNAP is less effective than it
could be. James Ziliak proposes a series of reforms to the
TFP aimed at strengthening nutrition assistance.

16 Nine Facts about the Great Recession and Tools for Fighting the Next Downturn
 ADVISORY COUNCIL

GEORGE A. AKERLOF RICHARD GEPHARDT ROBERT D. REISCHAUER

Koshland Professor of Economics President & Chief Executive Officer Distinguished Institute Fellow
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Harvard University Vice Chairman of Investment Banking Entrepreneur, Investor, and Philanthropist
and Managing Director, Lazard
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The Brookings Institution
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Perry Capital
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MEEGHAN PRUNTY EDELSTEIN Director
Senior Advisor
TIMOTHY F. GEITHNER
The Hamilton Project
President, Warburg Pincus
 FIGURE 1A. FIGURE 1B.

Depth and Duration of the Five Potential GDP vs. Actual GDP, 2005–15
Most-Recent Recessions
More than six years after the Great Recession ended, GDP remains about $400 billion below its potential.

0 19
Recession
$410
–1 billion
Percent change in real GDP

18

Trillions of 2015 dollars

Potential GDP

–2
17
Recessions:
Actual GDP
–3 1980
1981–82
1990–91 16
–4 2001
2007–09

–5 15
0 1 2 3 4 2005 2007 2009 2011 2013 2015
Years since prerecession GDP peak

Sources: Bureau of Economic Analysis 2016; CBO 2016b; National Bureau of Economic Research n.d.
Note: All values are seasonally adjusted. Actual GDP in figure 1b is smoothed using a three-quarter moving average. Gap between actual and potential GDP
($410 billion) is in constant 2015 dollars.

Fiscal Facts:
1. The Great Recession was unprecedented in the
postwar period for its severity and duration. 6. Well-targeted tax cuts can stimulate the
economy.

2. Employment losses in the Great Recession

were greater among men and the young. 7. Automatic stabilizers generate substantial, well-timed
stimulus.

3. Fiscal stimulus tempered the length and the

depth of the Great Recession. 8. Safety net programs varied widely in their
effectiveness as automatic stabilizers
during the Great Recession.
4. The federal funds rate is near historical lows
and cannot be reduced much farther.
9. Insufficiently financed rainy-day funds have left the
majority of states unprepared for the next recession.
5. Many spending programs provided highly
effective stimulus during the Great Recession.

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