This post discusses what should have happened in 2008-09 and what did happen in 2006-08. Reallocation of resources.

Instead, we got a deep recession in 2008-09.

Fortunately, Fed officials learned from their mistake and when services tanked due to the Covid crisis they pumped up nominal spending enough so that the decline in services was mostly offset with a booming goods sector.  This is from a very informative post by Jason Furman and Wilson Powell:

Between January 2006 and April 2008, housing construction plunged by more than 50% and yet the unemployment rate stayed low, rising from 4.7% to just 5.0%.  That’s how it should be. Productive resources were reallocated from housing to other sectors.  Then in late 2008, the Fed let NGDP plunge and output fell in almost all sectors of the economy.  Unemployment surged to 10% in late 2009, and then declined at an agonizingly slow rate.

This time things were different.  Unemployment surged to 14.8% in April of last year, but has already fallen back to 4.8% as job losses in services were partly offset by job gains in goods production.  That’s how things are supposed to work.  You don’t want to move inside the production possibilities frontier, you want to move along the PPF.

There can be a brief recession during a period of reallocation, but nothing like what we saw in 2008-09.  For that, you need overly contractionary monetary policy.

HT:  David Beckworth