The recession in 2001 was a period of economic decline lasting for eight months, beginning in March and continuing until November. While the economy recovered in the fourth quarter of that year, its effects persisted, and the national unemployment rate continued to rise, reaching 6% in June 2003. The following sections provide details about how the recession began and escalated, and what ultimately led to its end.
Contributors to the Recession: Y2K Fear and the September 11 Attacks
The Y2K scare (also known as the Year 2000 scare) may have contributed to the recession in 2001. Computer users and programmers feared that computers would fail on December 31, 1999. Since many computer codes represented the given year with the last two digits, they believed these codes would be unable to distinguish between the years 2000 and 1900. Based on the belief that their devices would stop working when the year 2000 arrived, many companies and individuals purchased new devices with software that was supposed to be Y2K compliant.
This fear led to a short-lived economic boom. Computer and software sales plummeted as they were all purchased before January 2000. Later, stock prices fell in March 2000, and as stock prices declined, dot-com companies went bankrupt. The situation was exacerbated when the Federal Reserve raised the federal funds rate multiple times in attempts to stem the economic growth.
Note: Although the Y2K scare contributed to the recession in 2001, it is not clear if the scare was the actual cause of the recession.
The recession was worsened by the September 11 attacks. Markets were closed for several days following the attacks, and the New York Stock Exchange did not reopen until September 17, 2001. On that day, the Dow Jones Industrial Average experienced its largest single-day drop, falling by 684.81 points or -7.1%.
The End of the Recession: Tax Cuts and Federal Funds Rates
To end the recession, President George W. Bush began working with Congress on tax cuts immediately after taking office. On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which provided retroactive tax relief for families back to January of that year. EGTRRA lowered the top tax rate from 39.6% to 35%, the 36% rate to 33%, the 31% rate to 28%, the 28% rate to 25%, and the 15% rate to 10%. EGTRRA also expanded the Earned Income Tax Credit. It doubled the standard deduction and increased the threshold for the 15% tax bracket for married couples, and it doubled the Child Tax Credit from $500 to $1,000.
These tax cuts enacted by the Bush administration allowed taxpayers to keep more of their own money. The economy began to grow again in the fourth quarter of 2001.
The Federal Reserve’s expansionary monetary policy also contributed to the end of the recession. The Federal Reserve started cutting interest rates in January 2001 and continued to lower them by about a full percentage point every month, bringing the rate to 1.82% (below 2%) by December 2001. These decisions were made in an effort to stimulate the economy by providing more liquidity.
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Sources:
– National Bureau of Economic Research. “The NBER’s Recession Dating Procedure.”
– U.S. Bureau of Labor Statistics. “Great Recession, Great Recovery? Trends From the Current Population Survey.”
– University of California, Berkeley. “UC Berkeley Computer Scientists Attack Y2K Bug With New Program to Find Millennium Glitches in C Applications.”
– Encyclopedia Britannica. “Y2K Bug.”
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Christian Wollscheid. “Rise and Burst of the Dotcom Bubble: Causes, Characteristics, Examples,” Page 1. GRIN, 2012.
– Foundation for Economic Education. “A Tale of Two Bubbles: How the Fed Crashed the Tech and the Housing Markets.”
– Board of Governors of the Federal Reserve System. “Remarks by Vice Chairman Roger W. Ferguson, Jr.”
– Dow Jones Industrial Average. “Index History.”
– The White House. “President Bush Helped Americans Through Tax Relief.”
– U.S. Congress. “H.R. 1836 – Economic Growth and Tax Relief Reconciliation Act of 2001.”
– Congressional Research Service. “Individual Income Tax Rates and Other Key Elements of the Federal Individual Income Tax: 1988 to 2019 Tax Years.”
– U.S. Congressional Research Service. “The Earned Income Tax Credit (EITC): A Brief Legislative History.”
– Urban-Brookings Tax Policy Center. “EGTRRA: Which Provisions Spell the Most Relief?”
– U.S. Department of Commerce. “Gross Domestic Product Fourth Quarter 2001 ‘Preliminary’ Estimate.”
– Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate.”
– Federal Reserve Bank of San Francisco. “Why Did the Federal Reserve System Lower the Federal Funds and Discount Rates Below 2 Percent in 2001?”
Source: https://www.thebalancemoney.com/2001-recession-causes-lengths-stats-4147962
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