- Causes and reasons: The dotcom bubble burst, the 9/11 attacks, and a series of accounting scandals at major U.S. firms all contributed to the economy’s relatively slight downturn. Within a few months, GDP had rebounded to its previous level.
In 2001, what happened to the economy?
The 2001 recession was an eight-month economic slowdown that lasted from March to November. 1 While the economy began to recover in the fourth quarter of that year, the effects lingered, and national unemployment rose to 6% in June 2003.
What triggered the 2000 recession?
After the comparatively mild 1990 recession ended in early 1991, the country’s jobless rate reached a late high of 7.8% in mid-1992. Large layoffs in defense-related businesses initially hindered job development. Payrolls, on the other hand, surged in 1992 and grew rapidly through 2000.
During the dot-com bubble in the late 1990s, there were predictions that the bubble would burst. Following the October 27, 1997 mini-crash, which occurred in the aftermath of the 1997 Asian financial crisis, predictions of a future burst intensified. During the first several months of 1998, this created an unstable economic climate. However, things improved, and between June 1999 and May 2000, the Federal Reserve hiked interest rates six times in an attempt to calm the economy and create a smooth landing. The NASDAQ fall in March 2000 was the catalyst for the stock market bubble to explode. GNP growth slowed significantly in the third quarter of 2000, reaching its lowest level since a contraction in the first quarter of 1992.
According to the National Bureau of Economic Research (NBER), a private, nonprofit, nonpartisan institution tasked with assessing economic recessions, the US economy was in recession from March to November 2001, a period of eight months during the start of President George W. Bush’s presidency. The Business Cycle Dating Committee of the National Bureau of Economic Research estimated that the US economy peaked in March 2001. A peak signals the conclusion of an expansion and the start of a downturn. The conclusion that the growth that began in March 1991 ended in March 2001 and a recession began is thus a conclusion that the expansion that began in March 1991 ended in March 2001. The expansion lasted exactly ten years, making it the longest in NBER history.
However, economic conditions did not meet the conventional shorthand definition of recession, which is “a decrease in a country’s real gross domestic product in two or more consecutive quarters,” causing some confusion regarding how to determine when a recession began and ended.
The NBER’s Economic Cycle Dating Committee (BCDC) determines peaks and troughs in business activity using monthly, rather than quarterly, indices, as seen by the fact that starting and ending dates are given by month and year, not quarters. However, a dispute over the exact dates of the recession led Republicans to label it the “Clinton Recession” if it could be linked to President Bill Clinton’s final term. As more and more definitive evidence became available, BCDC members indicated that they would be open to reviewing the dates of the recession. Martin Feldstein, President of the National Bureau of Economic Research, stated in early 2004:
The new data clearly shows that our March timeframe for the start of the recession was far too late. Before making a final decision, we need to wait for more monthly statistics. We won’t be able to make a decision until we get further information.
From 2000 to 2001, the Federal Reserve raised interest rates in order to preserve the economy from an inflated stock market. A recession would have started in March 2000, when the NASDAQ plummeted following the fall of the dot-com boom, if the stock market were used as an unofficial benchmark. The Dow Jones Industrial Average escaped the NASDAQ’s meltdown largely untouched until the September 11, 2001 attacks, when it suffered its greatest one-day point loss and worst one-week loss in history. After a brief recovery, the market crashed again in the final two quarters of 2002. The market ultimately recovered in the final three quarters of 2003, agreeing with unemployment figures that a recession defined in this approach would have lasted from 2001 to 2003.
According to the Labor Department, 1.735 million jobs were lost in 2001, with another 508,000 positions lost in 2002. A total of 105,000 jobs were added in 2003. Unemployment increased from 4.2 percent in February 2001 to 5.5 percent in November 2001, but did not reach a peak until June 2003, when it reached 6.3 percent, before falling to 5% by mid-2005.
When did the recession of 2001 begin?
Figure 1 depicts the growth rate of total output as measured by GDP over the last five years (the gray area denotes the start and conclusion of the recession, as calculated by the National Bureau of Economic Research) (NBER). According to the NBER, the recession started in March 2001 and ended in November of the same year.
While the recession was brief and moderate, total output growth has been below average for the most of the recovery’s first two years.
Overall, aggregate output has nearly equaled prior recessions at this stage in the cycles, but on a slightly different course.
Figure 2 depicts total output for each of the last three recessions, normalized to the start of the downturn (the business cycle peak).
What made the 2001 recession so unusual?
The brief duration of the 2001 recession isn’t the only distinguishing feature that sets it apart from past post-World War II recessions. 3 Another distinguishing aspect was its mildness, as evidenced by the drop in output (real GDP).
What was the government’s response to the recession of 2001?
State tax revenues were significantly cut during the recessions of 2001 and 2007, compelling the federal government to provide financial aid to shore up pressured state budgets. 3
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which primarily provided tax relief but also expanded the federal share of Medicaid by $10 billion and distributed a one-time appropriation of $10 billion to help states balance their budgets, was the federal government’s fiscal response to the 2001 recession.
4
The Great Recession was far worse, and the federal government responded with a much greater budgetary response: the American Recovery and Reinvestment Act of 2009. (ARRA). Although the legislation, like its predecessor from 2003, contained significant tax relief, it placed a considerably greater emphasis on program spending, which was initially anticipated to total about $500 billion over ten years. 5 The federal government eventually distributed $275 billion to states and municipalities through three key channels: 6
- The government part of Medicaid is expected to rise by $99 billion. 7 Because state contributions to Medicaid account for a significant amount of state spending, raising federal financing for the program was a simple method for states to relieve budget strains. 8
- A new $54 billion State Fiscal Stabilization Fund provided flexible subsidies for education, which helped states stabilize their budgets.
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- Appropriations for a variety of projects, many of which were run by states, including renewable energy, broadband deployment, and grants and loans for transportation infrastructure.
How did the Fed react to the recession of 2001?
The financial crisis that began in August 2007 was the most severe in the postwar era and, very possibly, the worst in modern history, when one considers the global scope of the crisis, its broad effects on a variety of markets and institutions, and the number of systemically critical financial institutions that failed or came close to failing. Although strong reactions from policymakers throughout the world prevented the global financial system from collapsing in the fall of 2008, the crisis was severe enough to cause a profound global recession from which we are only now beginning to recover.
Even as we seek to restore our financial system and revitalize our economy, it is critical that we learn from the crisis in order to avoid it from happening again. Because the crisis was so complex, there are numerous lessons to be learned, and they are not necessarily obvious. Both the private sector and financial authorities must, without a doubt, strengthen their ability to monitor and regulate risk-taking. The financial crisis exposed not merely flaws in regulators’ monitoring of financial firms, but also, more fundamentally, significant inadequacies in the global architecture of financial regulation. The Federal Reserve, for its part, has been working hard to uncover problems and enhance and strengthen our supervisory policies and processes, as well as advocating for significant legislative and regulatory reforms to address the crisis’s difficulties.
We must draw lessons from the crisis for monetary policy, just as we do for regulatory policy. However, the content of those lessons is debatable. Some analysts believe monetary policy has played a key role in the crisis. They claim that the Federal Reserve’s excessively easy monetary policies in the early part of the decade aided in the creation of a housing bubble in the United States, a bubble whose inevitable collapse has been a major source of financial and economic stress in the last two years. Proponents of this viewpoint often contend that monetary policy should play a much larger role in avoiding and regulating housing and other asset price bubbles. Others, on the other hand, argue that policy was suitable for the macroeconomic conditions at the time, and that it was neither a primary cause of the housing bubble nor the best tool for limiting price increases. Obviously, given the economic harm caused by the busts of two asset price bubbles in the last decade, the outcome of this discussion means a lot more than historical truth.
My words today are intended to throw some light on these issues. I’ll start by looking at monetary policy in the aftermath of the 2001 recession and evaluating whether it was appropriate given the status of the economy and the information available to policymakers at the time. Then I’ll go over some data about the causes of the housing bubble in the United States, including the influence of monetary policy. Finally, I’ll offer some recommendations for future monetary and regulatory policy. 1
I’ll start with a quick rundown of US monetary policy during the last decade, with an emphasis on the years 2002 to 2006. As you may be aware, the United States experienced a moderate recession from March to November 2001, which was mostly caused by the conclusion of the dot-com boom and the accompanying significant drop in stock prices. In the early part of the decade, geopolitical concerns resulting from the terrorist attacks of September 11, 2001, and the invasion of Iraq in March 2003, as well as a series of business scandals in 2002, further muddied the economic situation.
Slide 1 depicts the evolution of one significant monetary policy indicator, the Federal Open Market Committee’s goal for the overnight federal funds rate, from 2000 to the present (FOMC). The Federal Reserve controls the federal funds rate, which is the interest rate at which banks lend to one another, in order to impact broader financial conditions and, as a result, the economy’s trajectory. As you can see, in reaction to the 2001 recession, the target federal funds rate was quickly reduced, from 6.5 percent in late 2000 to 1.75 percent in December 2001 and then to 1% in June 2003. After falling to a then-record low of 1%, the target rate stayed at that level for a year. The FOMC began raising the target rate in June 2004, reaching 5.25 percent in June 2006 before halting. (As you may be aware, and as the right-hand portion of the graphic depicts, rates have lately been slashed considerably again.) During the period 2002-2006, the Committee’s low policy rates were accompanied with “forward guidance” on policy at various times. Beginning in August 2003, the FOMC stated four times in post-meeting remarks that policy would likely continue accommodating for a “considerable term.” 2
Two main considerations prompted the robust monetary policy reaction in 2002 and 2003. First, despite the fact that the recession officially ended in late 2001, the recovery remained sluggish and “jobless” far into 2003. In 2002 and the first half of 2003, real gross domestic product (GDP) increased at an average rate of just over 2%, inadequate to stop continuous increases in the unemployment rate, which peaked at over 6% in the first half of 2003. 3 Second, the FOMC’s policy response reflected concerns about an unwanted inflation drop. Taking note of Japan’s unpleasant experience, policymakers were concerned that the US would enter deflation and, as a result, the FOMC’s target interest rate would hit its zero lower bound, restricting the potential for further monetary easing. When faced with the possibility of meeting the zero lower bound, experts agreed that policymakers should cut rates ahead of time, minimizing the likelihood of being confined by the lower bound on the policy interest rate. 4
Although macroeconomic conditions in 2002 and ensuing years clearly necessitated accommodating policies, the question remains whether policy was made easier than it needed to be. Because we don’t know how the economy would have fared under different monetary policies, any solution to this question will have to be speculative.
Many people who have looked into this issue have compared Federal Reserve practices throughout this time period to recommendations derived from simple policy rules, such as the so-called Taylor rule devised by Stanford University’s John Taylor (Taylor, 1993). This method has a number of drawbacks that must be taken into consideration. 5 Simple policy principles like the Taylor rule, for example, are merely guidelines, and reasonable individuals can differ about essential features of their construction. Furthermore, simple rules omit numerous aspects that may be important in determining effective policy in a specific episodefor example, the risk of the policy rate reaching the zero lower boundwhich is why we don’t implement monetary policy only on the basis of such rules. For these reasons, even ardent supporters of simple policy rules often suggest that they be used only as guidelines and not as a replacement for more comprehensive policy studies; and that, to ensure robustness, the recommendations of a number of different simple rules should be evaluated (Taylor, 1999a). However, because such criteria were used in so much of the post-2001 recession argument regarding monetary policy, I’ll explore them here as well.
The well-known Taylor rule links the prescribed setting of the overnight federal funds ratethe interest rate targeted by the FOMC in its monetary policy-makingto two factors: (1) the current inflation rate’s deviation, in percentage points, from policymakers’ longer-term inflation objective; and (2) the so-called output gap, defined as the percentage difference between current output (usually defined as real GDP) and the normal or potential le rate. The equation shown on Slide 2 represents the standard form of the Taylor rule in symbols.
Was the economy in the 2000s strong?
According to a wide range of data, the last decade was the worst for the US economy in modern times, with zero net job growth and the weakest growth in economic output since the 1930s. Many people who stayed in jobs were impacted as well, with middle-income families earning less in 2008 than they did in 1999, when adjusted for inflationthe first decade since the 1960s that median incomes have decreased. Overall, American households fared worse:
And, when adjusted for inflation, the net worth of American householdsthe value of their homes, retirement savings, and other assets minus debtshas decreased, compared to substantial advances in every preceding decade since data were first gathered in the 1950s.
This was the first business cycle in which a working-age household was worse off at the end than it was at the start, despite significant productivity growth that should have been able to improve everyone’s well-being, said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.
The problem is that we mismanaged the macroeconomy, and that got us into enormous trouble, said IHS Global Insight Chief Economist Nariman Behravesh to the Washington Post. Meanwhile, Wall Street CEOs received an estimated $200 billion in bonuses in 2009, the majority of which would be tax-free. Despite efforts to pull Republicans on board, the House has already enacted finance regulatory reform without a single Republican vote, and some Senate Republicans have openly attacked reform.
In 2003, what happened to the economy?
The Iraq conflict loomed large at the start of the year. The Dow went below 8,000 in February, and the economy was “nervous, worried, and waiting,” as Wharton School of Business analyst Jeremy Siegal described it.
This, together with the president’s tax reduction package, placed money back in consumers’ pockets, which they spent.
What happened to the economy in the twenty-first century?
Because of inadequate job creation and an increasing divide between rich and poor, the middle class has not taken out an equal part of what it put into the economy, according to Bernstein.
In the 2000s, the country was hit by a jobless recovery. According to the EPI, job growth was only 0.6 percent throughout this time period, which was insufficient to keep up with the expanding population. As a result, at the end of the business cycle, there were 1.5 million more unemployed workers than at the start.
“The official unemployment rate in the 2000s undervalued how tough it was to obtain work,” EPI analyst Heidi Schierholtz said. “After the 2001 recession, the United States’ job-creation machine came to a halt, scarcely picking up momentum in the recovery.”
The State of Working America was co-written by Schierholtz, Bernstein, and Lawrence Mishel, another EPI economist. The book was first published in 1988, and the current edition includes chapters on jobs, earnings, and income that have been revised.
According to the book, the economy took four years after the 2001 recession to return to its original peak employment level, which is an unusual amount of time. The recovery took more than twice as long as the average of all recoveries after 1945, which was 21 months.
A second round of very weak economic growth near the end of the cycle did not support jobs.
Bernstein compared the economy of the 2000s to shampoo instructions: “Bubble, bust, repeat.” “We need to develop growth that is long-term and not based on speculative bubbles.”
Nearly one-fifth of unemployed workers had been jobless for at least six months by the end of the business cycle.
Furthermore, in the 2000s, one out of every eleven workers was underemployed because they were looking for full-time work but were forced to take part-time jobs. In the 2000s, workers’ hours were cut by 2.2 percent, canceling out a 1 percent increase in hourly income for the median family.
However, Sherk claims that unemployment rates are equivalent to those seen in decades other than the 1990s, when the tech boom created a disproportionate amount of jobs.
“Unemployment is high in comparison to the late 1990s, but not in comparison to the 1980s,” Sherk explained. “It’s not exceptionally high, especially given that the work force hasn’t risen at the same rate as it did in the 1990s.”