In case you were thinking I’ve been too upbeat lately, let’s talk about recessions. Economists can’t tell you when the next downturn is coming, but we can tell you if we’re ready for it.
Moreover, at least by one standard measure, even as the current expansion enters its ninth year, which is pretty old for a recovery, we still haven’t fully made up the damage from the last recession. And if President Trump and congressional conservatives have their way, the government’s “countercyclical function” — the temporary, automatic ramp-up in spending to offset recessions — will do much less to help those whacked by the next downturn. Meanwhile, conservatives’ financial deregulation agenda makes another economic shampoo cycle — bubble/bust/repeat — more likely.
In other words, Congress is undermining recession-readiness at the same time they’re proposing actions that make the next downturn more likely to occur.
Start with the figure below. The two lines are real and potential GDP per person, the latter being what GDP would be, according to the Congressional Budget Office, if the economy were operating at full strength. Thus, the difference between the two lines gives you an estimate of the per-person cost of recession.
Just eyeballing the figure, it’s clear that the current gap is larger than previous ones. Accumulating the losses over the full recovery amounts to a loss of $12,000 per person, a far greater loss than any other shown in the figure. That’s three times the loss in the second biggest gap in the figure, the one after the early 1980s recession. (Note to high-school calculus students: We’re integrating under the curve! See, you do use this stuff later in life.)
There’s another, more subtle observation allowed by the figure. The slope of the red line (potential GDP) has flattened of late. For several reasons, including scarring effects from the last recession, our aging demographics, and slower productivity growth, per-capita GDP growth even at full employment is slower than it used to be. And yet actual GDP still hasn’t caught up. It’s like a runner having trouble crossing a goal line that’s moving toward her!
With the costs of recessions/weak recoveries so high, it’s imperative that we arm ourselves with the tools to fight them. My big worry, again, isn’t that a big recession is around the corner but that we’re not ready for it when it inevitably arrives.
There are two bins of countercyclical, recession-fighting policy: monetary as per the Fed, and fiscal as per the Congress. Depending on when the downturn hits, monetary policy may not have had time to reload, meaning that the Fed’s main recession-fighting tool — the benchmark interest rate they lower in downturns — may still be too low to have much traction (not that I would want them to raise rates any faster!). A related problem is our low inflation rates. Slightly higher inflation going into a recession helps by making real interest rates lower and by making it cheaper for people to service their debts. Still, depending on who’s in charge over there, I’m confident that the Fed will do what they can to help.
It’s Congress I’m worried about. First, one reason for the big gap at the end of the figure above is that the federal government pivoted to deficit reduction too soon (to be fair, the Obama administration, which I was in at the time, contributed to this mistake). Any ramping up of countercyclical spending — for infrastructure, boosting safety net programs, even tax cuts — may well be blocked by the same ideological opposition to anything Keynesian that we saw in Congress last time, not to mention caps on discretionary spending that came out of that period.
But at least we’ve got the automatic stuff that kicks in when people start falling through the cracks, right? Not if anything like the proposed cuts to the safety net go through. Medicaid, SNAP (food stamps), employment programs, infrastructure spending — they’re all on the chopping block in both Republican budgets and health-care bills. One of the worst things they’re trying to do in this space is turn safety net programs, like SNAP and Medicaid, into block grants, which would end those programs’ critical countercyclical function (“per-capita caps” start out slightly better in this regard but, eventually, amount to the same thing).
Another Republican initiative in this space that would compound the damage to vulnerable people in recessions is the intention to add work requirements to safety net programs. Even in strong recoveries, that’s a terrible idea — do you really think less than $5 a day in food stamps is what’s keeping someone from working? But in recessions, when unemployment is rising quickly, work requirements make even less sense.
Pause for a second and note the cruel irony: Republicans are telling the poor, “damn it, get a job!” and then doing everything they can to make it harder for the poor to do so.
One bit of semi-positive news is that state “rainy-day” and unemployment insurance funds are mostly back to (or in some cases even above) pre-recession highs (see Figures 9-10 here). Why just “semi-positive?” Because, as budget expert Elizabeth McNichol pointed out to me: “State revenue have been growing very slowly for a few years, and the trend is expected to continue. For example, for the fiscal year just about to end, state revenue came in below original estimates in 33 states.” Depth of recession matters here, as well. Liz made the important point that states didn’t have the reserves they needed going into the last downturn, and “getting back to rainy-day fund levels that weren’t adequate in the past is not a sign of great fiscal health.”
Finally, consider that the last few downturns were caused by the bursting of speculative credit bubbles (dot.com and housing). Congress passed Dodd-Frank financial reform to deal with this problem, but as alluded to above, the passage of the Choice Act in the House signals an attempt by conservatives in the thrall of the deep-pocketed financial lobby to unwind these reforms and put the economy at risk again.
There’s a cost to dysfunctional, unrepresentative government. It may take a while to show up, but trust me, it will.