The Public Policy

This Recession’s Unprecedented Costs

If the previous nine recessions are any guide, this one will carry enormous fiscal costs.

By 2.10.09

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The economy has been in technical recession since December 2007. With the release of Friday’s GDP figures, the economy has now met the common definition of recession: two consecutive quarters of negative growth. Its 3.8% contraction in the fourth quarter of 2008, following a 0.5% contraction in the third quarter, was the greatest drop since 1982.

With each passing economic milestone, the recession becomes more a millstone. Its severity and uniqueness become ever more apparent. As the economic costs mount, what will be its fiscal costs? Undoubtedly enormous, if history is any guide. The table below presents the effect on federal outlays, revenues, and the deficit from the trough years of the last ten recessions.

Recessions’ Federal Budget Effects: 1948-2008*
(change from previous year)
       
Year Deficit Receipts Outlays
1949 638% -5.2% 30.5%
1954 -82% 0.1% -6.9%
1958 181% -0.4% 7.6%
1970 188% 3.2% 6.5%
1975 768% 6% 23.4%
1980 81% 11.6% 17.2%
1982 62% 3.1% 10%
1991 22% 2.2% 5.7%
2001 46% -1.9% 4.1%
2008 181% -1.7% 9.1%
       
Average 209% 1.7% 10.7%
       
Last 5 Recessions
Average 78.4% 2.66% 9.2%
       
*Source: Historical Tables of President’s Budget

If the 2009 deficit is simply within these historical parameters, it would range between $810 billion (taking the smaller average of just the last five recessions) and $950 billion (using the larger average of the last ten recessions).

But what if the current financial crisis is indeed without precedent since the Great Depression? What if the current year is not the bottom, but a springboard to an even deeper dive? Where does its fiscal impact end? The Congressional Budget Office (CBO) has released its 2009 deficit projection of $1.2 trillion, already outside these parameters -- despite the fact that it takes no account of the cost of current programs to address the crisis. As previous data and current projections both indicate, this recession’s cost could far outlast the recession itself.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.