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February 2017 Policy Study, Number 17-1


The Great Recession and the "New Normal" Economy





In 2008, the United States entered into the “Great Recession,” which is considered the greatest economic crisis since the Great Depression. The Great Recession was marked by a crisis in banking, tremendous unemployment, business decline, and a crisis in housing, as many Americans could no longer pay their mortgages. In return, banks were left with the nightmare of “toxic assets.” The blame and misery of the Great Recession were placed upon the failures of capitalism and free-market policies.  As historian Thomas E. Woods described:


Since the fall of 2008, as the stock market plummeted, companies folded, and economic fear and uncertainty began to spread, Americans have been bombarded with a predictable and relentless refrain: the free-market economy has failed.[1]


Woods correctly argues that to blame the free market for the Great Recession is to completely misunderstand the nature of our economic problems. “The current crisis was caused not by the free market, but by the government’s intervention in the market,” wrote Woods in his book, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.[2]


The response to the Great Recession by both President George W. Bush and President Barack Obama was to reject free-market principles and instead use the power of the federal government to attempt to bring recovery to the economy. As Woods wrote:


The remedy? According to Barack Obama, the late Bush Administration, Republicans and Democrats in Congress, and the mainstream media, it’s more regulation, more government intervention, more spending, more money creation, and more debt.[3]


The response to the Great Recession by both the Bush and Obama administrations focused on using the federal government along with Federal Reserve policy (quantitative easing) to end the recession. Policies such as TARP, Cash-for-Clunkers, and the billion-dollar stimulus spending bill (American Reinvestment Act) were designed to save the big banks from the toxic assets resulting from home mortgages and to stimulate the economy to encourage spending and employment.


Steve Forbes and Elizabeth Ames described some of these policies in How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy:


For many, massive spending by both the Bush and Obama administrations on a succession of corporate bailouts underscored the growing perception that the private sector had collapsed. Billions of dollars from the Troubled Asset Relief Program (TARP) and other sources were pumped into banks and insurance companies like AIG, once deemed “too big to fail.” Several of the nation’s leading financial institutions were nationalized in all but name. Then came the auto bailout and the government forced bankruptcies of General Motors and Chrysler . . .[4]


The result of these policies created the worst economic recovery in the post-World War II era. Peter J. Ferrara, a Senior Fellow at Heartland Institute, wrote:


 . . . it is clear that [President] Obama’s economic policies (“Obamanomics”), with their retro Keynesian foundation, produced the worst economic recovery from a recession since the Great Depression, worse than what every other president faced with a recession has achieved since the 1930s.[5]


The national economy is barley growing 2 percent a year. Today, the national debt is $20 trillion and rising, many Americans are underemployed or not employed at all, wages have either been stagnate or have fallen over the last several years, and record numbers of people are forced to be on some form of governmental assistance in order to survive. The result is more misery for the American people. For example, many American families today cannot afford a $400 emergency if one occurred. It is clear that the American economy is in trouble, and it is one of the most urgent domestic policy problems that we face as a nation. In fact, Peter J. Ferrara noted that some of the people who have suffered the most because of the Great Recession and the poor economic recovery “have been some of the President’s strongest supporters: African-Americans, Hispanics, young people, and women.”[6]


A recent study by McKinsey & Company found that “between 2005 and 2014, real incomes in those same advanced economies were flat or fell for 65 to 70 percent of households, or more than 540 million people.”[7] Columnist Terrence Jeffery reported that “medium household income in the United States (in constant 2014 dollars) was larger in 2006 ($56,598) than it was in 2014 ($53,657), the last year for which the Census Bureau has published a figure.”[8] The decline of the middle-class is one of the most difficult and disturbing trends over the last several years. As Peter Ferrara described:


Even since the recession ended in June 2009, the decline in median real household income was greater during Obama’s first term than during the recession. Three-and-a-half years into the Obama recovery, real median household income had fallen nearly 6 percent from the June 2009 level. That was more than twice the decline, 2.6 percent, that occurred during the recession itself, from December 2007 until June 2009.[9]


In addition, Ferrara noted that “in 2010, the number of Americans in poverty soared to the highest level in more than 50 years the Census Bureau has been tracking poverty.”[10] As Ferrara explained:


During Obama’s first term, the number of people in poverty increased by nearly 31 percent, to an all-time record of 49.7 million, with the poverty rate climbing by more than 30 percent, to 16.1 percent. Today, six million more Americans are in poverty than when Obama entered office. The poverty rate in early 2016 was still 14.8 percent, higher than when the War on Poverty was launched in 1966. This poverty is a natural result of negligible economic growth, paltry job creation, declining real wages, and the worst economic recovery since the Great Depression.[11]


America is entering into an unfortunate “new economy” with slow economic growth, lackluster employment, and declining or stagnant incomes. Many Americans are losing economic ground, and unless reforms are made the situation could get a lot worse.




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