Looking Back, Looking Forward

USNS Mercy Patient Boards
Patient boards USNS Mercy. U.S. Navy photo by Media Communication Specialist 2nd Class Ryan M. Breeden.

The COVID-19 pandemic blindsided the United States and the world. As Washington and the country struggle to confront it, what follows are some observations about how government responded to two other unanticipated crises. The first, the terrorist attacks on 9/11, came from an external threat. The second, the 2008 and 2009 financial crisis, resulted largely from an over-valued subprime market that triggered a financial panic and the Great Recession.

Despite the tragic loss of life, the lingering health effects of those at ground zero, and the physical damage to New York City and the Pentagon, 9/11 did not severely damage the economy. The country was already in a recession, and within two months of the attacks, the economy was pulling out of that recession. Conversely, the 2008-2009 financial crisis that led to the Great Recession was almost entirely an economic event, producing the worst economic downturn since the Great Depression and resulting in a weak and slow recovery as compared to past recessions. COVID seems to have combined the worst of the two, but with greater loss of life and more economic damage.

At the onset of all three crises, policy makers had little information on the nature or the extent of the threat but had to respond quickly. For 9/11, it wasn’t initially clear whether it was an isolated attack or the first in a series. The full severity of the financial crisis didn’t become clear until Lehman’s bankruptcy in September of 2008. We still don’t know the full extent of the COVID-19 pandemic, its future course, the actions necessary to bring it under control, or the future remedies.

Economic contractions provide plenty of opportunity for policy makers and society to contemplate what’s most important. As impacts of the new coronavirus crisis continue to hew more closely to the Great Depression rather than the Great Recession, it is clear that human capital matters more than physical or financial capital.

Over this past month, the Federal Reserve has exceeded the extraordinary actions during the Great Recession by injecting historic liquidity onto markets, but those actions cannot address the main thrust of demand: when will people be in a position and have the confidence to resume consumption sufficient to stabilize the economy? Addressing health care infrastructure deficiencies to better enable the return of a mostly healthy workforce matters more than airports, waterways and roads few Americans are using despite historically low financing and transportation costs. Helping workers pay for safe food and the rent or mortgage cannot go wanting if economic recovery is deemed a priority.

The human capital needs of vibrant economies render physical infrastructure investments beyond health care secondary to putting money and eventually jobs in the hands of idled workers. Analogues to the previous recession offer guidance. The U.S. financial system then needed liquidity injections, but policy makers also needed good data to triage finance companies eligible for assistance into three buckets: those adversely affected only by headline contagion; those requiring help to remain viable; and, those that could not be helped because they were doomed before the crisis hit.

To contain and eventually vanquish this current health care crisis, more data is needed for policy makers and frontline specialists to determine medical triage outcomes. We are unlikely to have an epiphany similar to the U.S. equity market rebound in early 2009 after bank stress tests were completed and revealed. Today, most everyone is focused on public health factors that necessarily will inform who gets to return to work when, where, and for what purpose.

During the Great Recession and its aftermath, U.S. policy experienced periods of common purpose and political disruption. The latter came in the summer of 2011 as posturing over debt forced the first (and soon forgotten) downgrade of debt underpinned by the world’s reserve currency. Damage to markets was swift but, thankfully, not enduring. This period of uncertainty pressured eurozone countries and the broader European Union to get serious about underlying risks in its banks—the only EU form of financial intermediation.

Bipartisanship, even if fragile or fleeting at times, allowed for enactment of a plan to stabilize the housing market (July 2008) and the broader economy (October 2008). In the 2008 election, Democrats secured a huge victory over Republicans, winning the White House, flipping 8 seats to take control of the Senate, and increasing their majority in the House by 21 seats. Less than a month after President Obama’s inauguration, the sense of common purpose on economic policy had all but disappeared when the American Recovery and Reinvestment Act passed absent House GOP support and with the support of only three Senate Republicans (February 2009).

Ever present political fissures were relatively contained in Washington’s initial legislative responses to coronavirus.

In the past two weeks, however, partisanship returned. Divided over whether states, localities, and hospitals merited immediate additional help along with more funding for small businesses, congressional action on a bill to replenish the Paycheck Protection Program was held up until after the program depleted its funding and bipartisan compromise could be reached.

While all three crises triggered dramatic and immediate emergency responses, the more structural policy responses took more time and led to new problems and differences. To take one example, immediately after 9/11, Congress passed the Patriot Act, which greatly enhanced the federal government’s investigative powers. Since its enactment, the tensions between civil liberties and national security have escalated, culminating recently in the expiration of the Foreign Intelligence Surveillance (FISA) program.

To compare the three crises, Chart I briefly summarizes some of the major policy responses to all three.

Policy makers today, as they consider their next steps on this crisis, face a dilemma. They will struggle to find bipartisan compromises for immediate emergency needs as Election Day approaches and policy and political tensions grow.

Policy Responses to Three Crises
2008-09 Financial Crisis
Initial emergency response
  • $15 billion airline package and $40 billion in emergency appropriations
  • TSA created
  • Patriot Act enacted 10/26/01
  • Unprecedented Fed response
  • GSE reforms and $40 billion in assistance enacted 7/30/08
  • $700 billion TARP enacted 10/3/08
  • Quicker, broader, and bigger Fed response
  • Four laws approaching $3 trillion
Committees and Commissions
  • Homeland Appropriations Subcommittee and House Homeland Security Committee created
  • 9/11 Commission created 11/27/02; unanimous report 7/22/04
  • TARP Congressional Oversight Panel created on 10/3/08; final report 3/16/11
  • Financial Crisis Commission created 5/20/09; report with all Republican- appointed members dissenting released 1/27/11
  • CARES Oversight Commission created 3/27/20
  • House Select Subcommittee Coronavirus Crisis created 4/23/20
Subsequent responses
  • DHS created on 11/25/02
  • DNI created on 12/17/04
  • Terrorism Risk Insurance Act enacted 11/26/02
  • $787 billion economic stimulus/Recovery Act enacted 2/17/09
  • Treasury stress test
  • Dodd-Frank enacted 7/21/10
  • TBD

Chart I. Source: FBIQ.