The Price the U.S. Will Pay for Faster Recovery
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Compared to the dotcom and great financial crisis recessions, our fiscal and monetary response over the last two years has been far more aggressive. But the true cost – in terms of inflation – presents a more threatening risk.
If you think back to the financial crisis of 2008 and the resulting near collapse of the financial system, your impression may be that the government acted swiftly to stabilize the economy and end the crisis. In fact, had it not acted as it did, the U.S. may well have been thrust into another Great Depression.
By contrast, in terms of employment and economic output, the economic damage resulting from the 2020 global pandemic was much more severe than what was experienced following the 2008 crisis. Yet, the recent economic recovery was extraordinarily rapid compared to 2008. To a large extent, the speedier recovery was the result of the government’s stronger fiscal responses that played out in 2020 and 2021. But, as the macro economist Richard Duncan has pointed out, that quicker recovery has come with the severe cost of high inflation. And maybe more.
Over the one-year period between March 2020 and March 2021, laws were passed that authorized $5.1 trillion of fiscal support of the U.S. economy. This amount was nearly 25% of GDP. That is more than five times the stimulus the government provided in 2008. The chart below illustrates the level of government fiscal responses to three recent financial crises beginning with the dotcom bust of 2000.