I’d like to first demonstrate how we know that the economy did much better in 2021 than in 2009, and then explain why the outcome was better this time around.

In 2009, the main problem was unemployment. Today, the main problem is inflation. So “who’s to say” which economy was better?

To answer this question, we need to also look at real GDP. Inflation doesn’t directly reduce living standards, as when one person pays more for a good it just means that another person receives more. The real problem with inflation is that it may be associated with falling RGDP. With less output, living standards will suffer.

By this measure, we are doing far better in 2021 than in 2009. But average per capita real GDP (i.e. efficiency) isn’t everything; people have drowned in lakes with an average depth of only three feet. What about equity?  How has the pain been spread around? We need to consider the famous “equity-efficiency trade-off”.

Surprisingly, the results are exactly the same when we add equity to the equation. Inflation imposes a small amount of pain all across the economy. In contrast, the pain from high unemployment is highly concentrated.

If you want a simple explanation of why 2021 is much better than 2009, consider that unemployment today is 4.6%, whereas it was 10% in October 2009. That’s an enormous difference, and it represents the main cost recessions. A whole generation of young people faced a hostile job market during and after the Great Recession. Today, in contrast, there are more job openings than ever before.

OK, but why did the economy of 2021 end up much better than in 2009? In 2021, there are still enormous challenges related to Covid, such as the difficult problem of “re-allocating” output from the service sector to the goods sector. This reallocation problem is far more difficult than in 2009, when we merely faced the challenge of reallocating output away from residential construction, a much smaller sector than consumer services. So why are we doing better this time around?

In 2009, the bad economy was caused by the Fed’s decision to allow NGDP to languish at a level far below the previous trend line. I recall speaking with one prominent new classical economist back in late 2008, who argued that pumping up NGDP would just lead to more inflation without boosting real GDP. It would have led to more inflation—that part was correct—but it would also have led to much more real GDP, and a much stronger labor market.

This time around the Fed has learned its lesson and pushed NGDP quickly back to the previous trend line. Indeed the current risk is that they’ll overshoot and produce too much NGDP, too much inflation. Let’s hope that doesn’t happen.

PS.  I don’t know what public opinion polls would say about the relative performance of the 2009 and 2021 economies, but they are not the best way to look at the issue.  Imagine a group of 100 people.  At exactly noon today a mosquito bites 99 of them, while the 100th recovers from cancer.  Is this group of 100 people better off or worse off?  If you polled all 100 people and asked them if they felt better than a few minutes earlier, what would most say?  What is the change in aggregate welfare?