The two most recent recessions—the one that accompanied the global financial crisis of 2007-2008 and the Covid recession of 2020—could not have been handled more differently, and therein lie some valuable lessons, economist Stephanie Kelton said today at Schwab Impact 2022.

As a keynote speaker on the last day of a conference, where talk of a 2023 recession wormed its way into nearly every presentation, Kelton, a professor at New York's Stony Brook University, said she hopes those two previous experiences provide lessons for the next recession, which seems to be right around the corner. In economic circles, Kelton is considered one of the leading advocates of Modern Monetary Theory (MMT), which is controversial but has been embraced to varying degrees by central banks over the last decade.

“After the financial crisis, in the recession that followed, the U.S. lost about nine million jobs. Do you remember how long it took to claw back the jobs that were lost?” she asked the crowd. “It took about seven years to get those jobs back. And when those jobs came back, they were in many ways inferior to the jobs that had been lost. This was no economic recovery that anybody looks back on with great pride.”

In that recession, the government responded with a fiscal package to “keep the wheels from coming off the economy,” she said. That package was for $787 billion, Kelton said, which was not nearly enough to dig the economy out of the massive hole it was in. “It helped, but it didn’t do enough.”

Congress balked at doing more for fear of driving up the deficit, with an eye toward the debt crises that was going on in parts of Europe, she said. However, what Congress didn’t understand was that those countries had all replaced their sovereign currencies with the euro, which made it impossible for them to borrow, Kelton said. (Countries like the U.S., Japan, Canada, Australia and the U.K. have their sovereign currencies and borrow only in the currency that they issue.)

“And so the lesson that we drew in 2010, watching what was happening on the other side of the pond, was the wrong lesson. And it held us back,” she said. “We had huge consequences in terms of the loss of output, loss of income, loss of wealth, the higher rate of unemployment—we had a lackluster recovery, and we could have done so much better.”

Fast forward to 2020, and the Covid pandemic. In March, Congress passed the first of three financial packages, and by the time they were done in March of 2021, $5 trillion had been deployed with little resistance, she said.

“It helped to support incomes. It helped to support the economy. We lost 22 million jobs in the first two months. Do you know how fast we got them back? Two and a half years,” she said. “So we clawed back 22 million jobs in two and a half years this time, compared with seven years to get back nine million jobs after the financial crisis.”

Thanks to a much more robust fiscal response, the U.S. made a rapid recovery, she said. “We experimented with fiscal policy in a more aggressive way,” Kelton said. “We got a better recovery, but we got inflation alongside of it.”

Now that the Fed is considered responsible for dealing with this inflation, the one crude tool it has—interest rates—can be effective, she said. Raising interest rates can lower inflation. But raising interest rates can also sometimes raise inflation, Kelton said, as rolled-over debt becomes more expensive to manage and companies raise prices to compensate.

In hindsight, lawmakers went too far, and it would have been better to have more targeted spending, she said. But Kelton also said she wouldn’t trade the problem of inflation for what would have happened if the government had responded to the pandemic the way it did in 2008.

“We’re much better off today because of what took place,” she said. “And we learned some things about how monetary and fiscal policy work. And I hope that when the next crisis comes, and maybe we’re bringing it on ourselves, we’ll do better next time.”