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Recession Ready SLOWDOWNS IN THE ECONOMY ARE INEVITABLE. BOUSHEY While it may be tempting to rely on Federal Reserve policy as a lone re- sponse to recessions, this would be a mistake; we know that fiscal stim- / ulus is effective. Rather than wait for a crisis to strike before designing NUNN discretionary fiscal policy, we would be better served by preparing in ad- vance. Enacting evidence-based automatic stabilizer proposals before the / SHAMBAUGH next recession will help the next recovery start faster, make job creation stronger, and restore confidence to businesses and households. RECESSION CONTRIBUTORS Heather Boushey, Washington Center for Equitable Growth Gabriel Chodorow-Reich, Harvard University RECESSION READY John Coglianese, Board of Governors of the Federal Reserve System Indivar Dutta-Gupta, Georgetown Center on Poverty and Inequality Matthew Fiedler, USC-Brookings Schaeffer Initiative for Health Policy and the Brookings Institution Jason Furman, Harvard Kennedy School and Peterson Institute for READY International Economics Andrew Haughwout, Federal Reserve Bank of New York Hilary Hoynes, University of California, Berkeley Michael Ng, Hutchins Center on Fiscal and Monetary Policy TO Ryan Nunn, The Hamilton Project and the Brookings Institution Jimmy O’Donnell, The Hamilton Project FISCAL POLICIES Wilson Powell III, Harvard Kennedy School Claudia Sahm, Board of Governors of the Federal Reserve System THE AMERICAN ECONOMY Jay Shambaugh, The Hamilton Project, the Brookings Institution, STABILIZE and The George Washington University Ocial logo Website colors Louise Sheiner, Hutchins Center on Fiscal and Monetary Policy#4a4a4a and EDITED BY #67c2a5 #d94343 the Brookings Institution Dark #bd9f45 Multimedia branding Chart palatte color Chart horizontal branding Reverse Dark Ocial logo #5c7aa5 #5bc0be #CE0A1A #b400 #178c58 #711c77 #f6511d #006ba6 Growth Equitable Diane Whitmore Schanzenbach, Northwestern University#776493 #f1e764 Reverse HEATHER BOUSHEY, RYAN NUNN, #f1f0f0 background AND JAY SHAMBAUGH Chart branding horizontal #f1f0f0 background Website colors Website Chart color palatte #f1e764 #776493 #5c7aa5 #bd9f45 #d94343 #67c2a5 #4a4a4a #006ba6 #f6511d #711c77 #178c58 #b400 #CE0A1A #5bc0be Multimedia branding Equitable Growth Ocial logo Website colors #4a4a4a #67c2a5 #d94343 Dark #bd9f45 #5c7aa5 #776493 #f1e764 Reverse Recession Ready: Chart branding horizontal Fiscal Policies to Stabilize#f1f0f0 background Chart color palatte the American #006ba6Economy #f6511d #711c77 #178c58 #b400 #CE0A1A Edited by #5bc0be Heather Boushey, Ryan Nunn, and Jay Shambaugh Multimedia branding Equitable Growth MAY 2019 ii Acknowledgments The Hamilton Project is grateful to the members of its Advisory Council for their valuable contributions, with special thanks to Roger C. Altman, Robert E. Rubin, and Jason Furman for helpful discussion and insights. The Washington Center for Equitable Growth would like to thank the Open Philanthropy Project for their support. The contents of this volume and the individual papers do not necessarily represent the views of individual Advisory Council members, nor do they necessarily represent the views of the institutions with which the papers’ authors are affiliated. The chapters contained in this volume were greatly improved by the expert comments provided by participants at the January and February 2019 authors’ conferences held at the Brookings Institution. We are grateful to all who participated in those meetings. The editors wish to acknowledge the impressive contributions of the entire staffs of both The Hamilton Project and the Washington Center for Equitable Growth. We are thankful to Kriston McIntosh for her advice on all aspects of production, as well as her thoughtful comments on much of the book. Lauren Bauer, David Dreyer, and Alyssa Fisher contributed substantially to the development of the book. Jimmy O’Donnell managed the book production process from beginning to end, and Becca Portman performed superb book layout and graphic design. Patrick Liu, Somin Park, Jana Parsons, Jacob Scott, Christian Henry, and Catherine Peng provided excellent research assistance. We are also grateful for the contributions of Alison Hope and for valuable input from Stacy Anderson, Dave Evans, Melanie Gilarsky, Erica Handloff, Bonnie Kavoussi, and David Mitchell. Brianna Harden designed the cover. The policy proposals included in this volume are proposals from the authors. As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad- based participation in growth, and economic security. The authors are invited to express their own ideas in policy papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. These policy papers are offered in that spirit. iii Table of Contents Foreword 1 Introduction 5 Heather Boushey and Jay Shambaugh The Damage Done by Recessions and How to Respond 11 Heather Boushey, Ryan Nunn, Jimmy O’Donnell, and Jay Shambaugh How Stabilizing Has Fiscal Policy Been? 49 Louise Sheiner and Michael Ng Direct Stimulus Payments to Individuals 67 Claudia Sahm Increasing Federal Support for State Medicaid and CHIP Programs in Response to Economic Downturns 93 Matt Fiedler, Jason Furman, and Wilson Powell III Infrastructure Investment as an Automatic Stabilizer 129 Andrew Haughwout Unemployment Insurance and Macroeconomic Stabilization 153 Gabriel Chodorow-Reich and John Coglianese Improving TANF’s Countercyclicality through Increased Basic Assistance and Subsidized Jobs 181 Indivar Dutta-Gupta Strengthening SNAP as an Automatic Stabilizer 217 Hilary Hoynes and Diane Whitmore Schanzenbach About the Authors 239 iv 1 Foreword he Great Recession is remembered, and properly so, for its massive Tdestruction of household wealth and job losses that reached over 800,000 in a single month. In just the fourth quarter of 2008, real GDP fell at an annual rate of 8.4 percent, while economies across the world were savaged by problems as bad as or worse than our own. Remembered too are the scars left by the economy’s punishing decline: an uneven recovery, many workers who remain disconnected from the job market, an increased debt level, and permanent losses in GDP. We should also recall how bold and decisive policy actions quickly stopped and reversed the decline. Thanks to a massive countercyclical fiscal stimulus, unprecedented Federal Reserve monetary policy actions, and bold steps to stabilize the financial system, GDP resumed growing in the 3rd quarter of 2009 and rose vigorously in the 4th. Economists estimate that, by 2011, real GDP was 16 percent higher and unemployment was almost seven percentage points lower than they would have been had such firepower not been deployed.1 The economic expansion that started almost ten years ago continues to this day. Policymakers should know that the “stimulus,” derided as an “8-letter word”2 in the overheated political debates at the time, worked; though not every program performed equally well. So, they should examine the findings of mainstream economists who have documented the effectiveness and limitations of the policies which steered our economy away from the abyss. 1. Blinder, Alan S., and Mark Zandi. 2015. The Financial Crisis: Lessons for the Next One. Washington, DC: Center on Budget and Policy Priorities. 2. Geithner, Timothy. 2014. Stress Test: Reflections on Financial Crises. New York, NY: The Crown Publishing Group, 453. 2 Recessions are inevitable. Policymakers who might rely on Federal Reserve policy as the lone response to recession should think again; we know that fiscal stimulus is effective. Furthermore, economic conditions have changed; were the U.S. economy to fall into recession in this current low interest rate environment, the Fed’s monetary policy options would be far more limited than they were in 2009, and a higher debt level could complicate the use of discretionary stimulus. Consequently, policymakers should learn about proposals to help the next recovery start faster, make job creation stronger, and restore confidence to businesses and households so they resume investing and spending again. Enacting these proposals in fully reasoned detail before the next recession strikes will help us avoid the delays and risks associated with writing stimulus legislation in the middle of a meltdown. This volume—a joint project by The Hamilton Project and the Washington Center for Equitable Growth—focuses on the workhorse antirecession programs known as “automatic stabilizers.” As defined by the Congressional Budget Office, “automatic stabilizers are the automatic increases in revenues and decreases in outlays in the federal budget that occur when the economy strengthens, and the opposite changes that occur when the economy weakens.”3 Our tax system is an automatic stabilizer because revenues decline with income. On the spending side, the most-familiar automatic stabilizers include unemployment insurance, Medicaid, and the Supplemental Nutrition Assistance Program. These programs direct benefits to the people and places most deeply affected by economic shocks, and to the beneficiaries most likely to spend rather than save, helping households meet basic needs while providing stimulus that in turn saves or creates jobs. The boost to the economy from such automatic stabilizers can be timely,
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