It really was the end of the world.
It's hard to remember now, but in 2008 Lehman's collapse seemed like the start of something worse than a second Great Depression. As Barry Eichengreen and Kevin O'Rourke point out, world trade, world stock markets, and world industrial production all fell faster in 2008 than in 1929. It was just about the biggest economic shock in recorded history, and the abyss beckoned.
But we avoided it. We "only" got a Great Recession, and not the Greater Depression. That's clear enough in the charts above (and in the fact that we still have something called "an economy," and aren't all farmers today). As you can see, the 2008 crash started out worse than the 1929 one, but soon stabilized and then started to recover. That's because, despite the quicker collapse, policymakers today didn't make all of the mistakes of the 1930s. Instead of raising rates and trying to balance budgets as the bottom fell out, they did the opposite—at least initially. In early 2009 China launched a relatively massive $585 billion infrastructure program. The Fed started printing money and buying bonds à l'outrance. And then there was the stimulus.
It's become a political four-letter word, but the reality is that the $787 billion stimulus was too small for the job, and even smaller than it sounded. A full $70 billion of it didn't go to new programs, but rather to fixing the Alternative Minimum Tax. That left far too little money to fill the economy's hole—a hole that was far deeper than we realized at the time. Indeed, when the administration said the Recovery Act would keep unemployment below 8 percent, it thought GDP was falling 3.8 percent; subsequent revisions showed it was actually falling 8.9 percent.
But even if so much of the stimulus hadn't gone to non-stimulus, and even if we'd known exactly how bad the economy was, there was one last problem. The administration assumed this time wasn't different. That the economy would bounce back on its own—and soon. But it didn't, and they should have known that it wouldn't. Financial crisis recoveries tend to be nasty, brutish, and long. The shock of seeing the world as we know it almost melt away scares people into not spending—if they can even afford to spend. Many couldn't, because household debt was so high. In other words, the stimulus wasn't about kickstarting a recovery that wasn't coming. It was about preventing a depression that was.
So I come not to bury the stimulus, but to praise it. Yes, it should have been bigger. And yes, it was oversold. But it helped put a floor under the economy when there was none, and people still miss that. They miss it, because the stimulus was designed to be missed. There were tax cuts people didn't notice, because they got them each pay check instead of as a lump sum. There was aid to state and local governments that people didn't notice, because you don't see the layoffs that would have happened but didn't. And then there were the moonshots that people didn't notice. An education reform—Race to the Top—that offered prize money to schools that adopted tougher standards, performance-based evaluations, and lifted caps on charters. A clean energy revolution that, despite a few misses, has, as Mike Grunwald points outs, increased wind energy by 145 percent and solar panel installations by 1,200 percent. And money to get hospitals to shift from paper to electronic records.