Bruce Yandle

It was a late afternoon conversation on the back patio. Dot, my wife, and I were talking about major events that have occurred in our almost 70 years of marriage, and that’s a lot of ground to cover. “Do you recall a time like this when it seems the world is coming apart: COVID shutdowns, financial distress, the Ukraine war, the Middle East, and constant economic upheavals, and now a huge financial market sell-off”? Dot asked.

After thinking a bit, I admitted that I could not recall anything quite like the last 15 years.

Dot responded with a challenge: “If you were made economics czar in January and had full sway to change federal policies, what would you do to make things better? Taxes? Regulation? What?”

After a long silence, which gave me a chance to think a bit, I suggested two things that I would do as economics czar. The answers? First, the right kind of nothing — a year-long ban on any changes in taxes, spending, regulation, tariffs, and monetary policy, and during that pause, a call for a long conversation with the American people about their hopes, dreams, and future promise.

Now, some background.

There’s no doubt about it, since the 2008 Great Recession, the U.S. economy has been roiled to look more like the Great American Scream Machine than the Great American Bread Machine. The Federal Reserve is still trying to reduce inflation from the high nines to a 2% goal while working to avoid another recession. Meanwhile, presidential candidates from both parties are calling for more tariffs, higher taxes for some and lower for others, and more or different kinds of regulation.

Put another way, the economics medicine men and women are on the hunt. With external shocks aplenty, like energy interruptions, wars, and a pandemic, we have been on a bumpy policy path with more potholes promised.

Just to put some dimensions on the roller-coaster turbulence experienced by the American people since 2007, consider this. The unemployment rate stood at 4.7% in October 2007. It rose to 10.0% in October 2009 during the recession, just two years later. The rate then plummeted as the economy became flush with stimulus money and hit 3.5% in February 2020. Then, with COVID shutdowns, the unemployment rate jumped to 14.8% in April 2020, the largest one-month increase since 1939. It then fell to 3.4% in April 2023, after the Fed continued to cut interest rates, but rose to 4.3% in July 2024 following a Fed policy reversal. We are almost back where we started in 2007. Whew!!! What a ride!

The Fed’s goosing and then braking actions delivered higher interest rates, which in turn took a bite out of economic activity. The effects are seen in the average interest rate paid nationwide for 30-year fixed-rate mortgages. The rate paid in third quarter 2007 stood at 6.55%. This was before the 2008 Great Recession, COVID, and the later battle against inflation. Long after the recession, in the fourth quarter of 2012, when the economy was flooded with money, the rate fell to 3.36%. Then, when the Fed reversed engines and began to tighten, the mortgage rate rose to 4.78% in 2018’s fourth quarter. In 2024’s second quarter, it hit 7.0%. When the trip started in 2007, the mortgage rate stood at 6.55%. We are almost back. What a ride!

To get a handle on government intervention during all this, the Brookings Institution’s Hutchins Center produces a Fiscal Impact Measure that estimates how much local, state, and federal spending adds to GDP quarterly growth. The measure’s four-quarter moving average stood at minus 0.25 percentage points in 2007’s third quarter. At the time, there was no meaningful government stimulus. After efforts to cushion the effects of the 2008 recession, the measure jumped to 2.62 percentage points in 2009’s fourth quarter. In 2018’s second quarter, the measure rose to 3.85 percentage points, and in 2021’s first quarter, 5.23 percentage points. Brookings predicts that the Impact Measure will register minus 0.08% in this year’s fourth quarter. This is close to where the ride started in 2007. Finally, real GDP growth was hitting 2.41% in 2007’s third quarter. The most recent estimate shows 3.1% for 2024’s second quarter.

We are back! But as Jerry Lee Lewis might have put it, there was “a whole lotta shakin’ goin on.”

So, with this background in mind and memories of the rough roller-coaster ride still intact, let’s have a year-long policy pause and give the economy a chance to find itself, to regain balance and move forward. Of course, we will have to respond to external shocks, should they occur, but let’s not add any of our own making.

And while catching our economic breath, let’s have a national conversation with hearings in major cities speaking to the fundamental question: What are our hopes and dreams, and what is our future promise?

Bruce Yandle is a distinguished adjunct fellow for the Mercatus Center at George Mason University.