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How Does the COVID Recession Compare?

Although every recession is different, history offers lessons for the current pandemic-induced downturn. Amid so much uncertainty, policymakers should focus on keeping taxes low, developing plans for fiscal consolidation, and avoiding new regulations until the economy is back on track.

STANFORD – The historically deep COVID-19 recession appears to have turned the corner in most countries. But current private and official forecasts, if correct, imply that most economies will not return to their previous performance peaks until late 2022. Much will depend not only on the evolution of the pandemic and effective therapeutic and vaccine deployment, but also on the monetary, fiscal, trade, and regulatory policies that are pursued. Policymakers and commentators are thus examining previous episodes in search of an effective response.

All recessions differ in terms of their proximate cause. Several post-World War II recessions in the United States followed monetary-policy tightening by the US Federal Reserve to control rising inflation. The deep recessions of 1973-75 and 1981-82 followed large oil shocks (when the economy relied more heavily on energy imports than it does now). And the 2001 recession came after the dotcom bubble burst.

America’s 2008-09 Great Recession, by contrast, was caused by a crisis stemming from overleveraged financial institutions. The US had engaged in serial social engineering to extend home loans to people who traditionally would not have qualified for them, causing housing prices and household debt ratios to rise to unsustainable levels. The subsequent decline in housing prices and explosion of foreclosures and unemployment hit aggregate demand, resulting in the third major recession of the post-war era.

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