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The Better Crisis Response

We can and should prepare for all the specific shocks we can imagine. And what we've learned over the past 30 years is that the best way to prepare for the unforeseeable is to help people live healthier and more prosperous lives in good times, and to offer as much help as possible to everyone who needs it when bad times come again.

WASHINGTON, DC – If a meteor hits Earth, a major natural disaster strikes, or any other shock of previously unanticipated dimensions occurs, how should economic policymakers respond? There are two plausible alternatives: focus on helping the financial sector, along the lines of what was done in 2008-09, or go as big as possible in helping everyone who needs help, as was done in 2020-21. While the 2008 crisis response was better than many alternatives, what was achieved in 2020 should become our reference point for dealing with systemic cataclysms.

Next time, however, we need to do even better in terms of helping people at the lower end of the income distribution. This requires significant investments in social infrastructure that should really start today.

In the aftermath of the 2008 global financial crisis, the consensus among policymakers in the United States and Europe was that rescue measures should focus on helping prevent bankruptcy in the financial sector. This meant providing additional equity capital on advantageous terms and attempting to boost asset prices as much as possible. The amount of support provided directly to homeowners and the unemployed was small by comparison, and there was also no consideration given to non-financial firms (restaurants, shops, hotels, and so on) that were blindsided by the disaster.

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