The 2001 Recession

Y2K Scare, 9/11 Attack, and Beyond

President Bush Dealing With the 2001 Recession.
•••

Eric Draper / The White House / Getty Images

The 2001 recession was an eight-month economic downturn that began in March and lasted through November. While the economy recovered in the fourth quarter of that year, the impact lingered and the national unemployment continued to climb, reaching 6% in June 2003. The following sections provide details on how the recession started and worsened, and what ultimately led to its end.

Contributors to the Recession: Y2K Scare and 9/11 Attack

The Y2K scare (also known as the Year 2000 scare) may have contributed to the 2001 recession. Computer users and programmers feared that computers would stop working on December 31, 1999. Since many computer codes represented a given year with the last two digits, they believed that these codes would not be able to distinguish between 2000 and 1900. Based on the belief that their computers would stop working when the year 2000 arrived, many companies and individuals bought new ones with software that was supposed to be Y2K compliant.

The scare led to an economic boom that was short-lived. Computer and software sales declined, since they were all bought in advance of January 2000. Subsequently, the stock market dropped in March 2000, and as stock prices declined, dot-com companies went bankrupt. The circumstances were exacerbated when the Federal Reserve raised the fed funds rate numerous times in efforts to stop the economy from overheating.

While the Y2K scare contributed to the 2001 recession, it is not clear whether the scare in fact caused it.

The 9/11 attack worsened the downturn. The markets closed for several days after the attacks, and the New York Stock Exchange did not reopen until September 17, 2001. That day, the Dow Jones Industrial Average (DJIA) had its largest one-day drop, falling 684.81 points or -7.1%.

End of the Recession: Tax Cuts and Fed Funds Rates

To end the recession, President George W. Bush began working with Congress to cut taxes immediately upon entering office. On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which gave income tax relief to families retroactive to January of that year. EGTRRA lowed the maximum tax rate of 39.6% to 35%, the 36% rate to 33%, the 31% rate to 28%, the 28% rate to 25%, and some of the 15% tax rate to 10%. EGTRRA also expanded the Earned Income Tax Credit. It also doubled the standard deduction, raised the threshold for the 15% tax bracket for married couples, and doubled the child tax credit from $500 to $1,000.

These tax cuts by the Bush administration enabled taxpayers to keep more of their own money. The economy returned to growth in the fourth quarter of 2001.

The Federal Reserve's expansionary monetary policy also contributed to the end of the recession. The Federal Reserve began lowering rates in January 2001, and continued to lower them by approximately one-half point each month, so that the rate was 1.82% (i.e., lower than 2%) by December 2001. This decision was made out of an effort to stimulate the economy by providing for more liquidity.

Article Sources

  1. National Bureau of Economic Research. "The NBER's Recession Dating Procedure." Accessed Jan. 13, 2020.

  2. U.S. Bureau of Labor Statistics. "Great Recession, Great Recovery? Trends From the Current Population Survey." Accessed Jan. 13, 2020.

  3. University of California, Berkeley. "UC Berkeley Computer Scientists Attack Y2K Bug With New Program to Find Millennium Glitches in C Applications." Accessed Jan. 13, 2020.

  4. Encyclopedia Britannica. "Y2K Bug." Accessed Jan. 13, 2020.

  5. Christian Wollscheid. "Rise and Burst of the Dotcom Bubble: Causes, Characteristics, Examples," Page 1. GRIN, 2012.

  6. Foundation for Economic Education. "A Tale of Two Bubbles: How the Fed Crashed the Tech and the Housing Markets." Accessed Jan. 13, 2020.

  7. Board of Governors of the Federal Reserve System. "Remarks by Vice Chairman Roger W. Ferguson, Jr." Accessed Jan. 13, 2020.

  8. Dow Jones Industrial Average. "Index History." Accessed Jan. 13, 2020.

  9. The White House. "President Bush Helped Americans Through Tax Relief." Accessed Jan. 13, 2020.

  10. U.S. Congress. "H.R. 1836 - Economic Growth and Tax Relief Reconciliation Act of 2001." Accessed Jan. 13, 2020.

  11. Congressional Research Service. "Individual Income Tax Rates and Other Key Elements of the Federal Individual Income Tax: 1988 to 2019 Tax Years." Accessed Jan. 13, 2020.

  12. U.S. Congressional Research Service. "The Earned Income Tax Credit (EITC): A Brief Legislative History." Accessed Jan. 13, 2020.

  13. Urban-Brookings Tax Policy Center. "EGTRRA: Which Provisions Spell the Most Relief?" Accessed Jan. 13, 2020.

  14. U.S. Department of Commerce. "Gross Domestic Product Fourth Quarter 2001 'Preliminary' Estimate." Accessed Jan. 13, 2020.

  15. Federal Reserve Bank of St. Louis. "Effective Federal Funds Rate." Accessed Jan. 13, 2020.

  16. Federal Reserve Bank of San Francisco. "Why Did the Federal Reserve System Lower the Federal Funds and Discount Rates Below 2 Percent in 2001?" Accessed Jan. 13, 2020.