President Trump is right—the economy is in better shape today than it’s been in decades. But he should watch how he gloats, because we’re only enjoying the calm before the storm.
There are now more job openings in American than unemployed folks, and while secular forces are keeping a lid on wage increases, there are signs that the economy is overheating and may quickly tip into the sort of imbalance that signals an imminent correction and recession.
Economists are notoriously bad at predicting a recession, but we know one is in our future, and a growing chorus of voices says it will arrive within the next two years. Two-thirds of economists surveyed by the National Association of Business Economists say there will be a recession by the end of 2020. Meanwhile, there has been a run up in prices on nearly every investable asset, from stocks, to bonds, to oil. The latter being a particularly reliable recession indicator.
It’s therefore worth considering just how ill-prepared the country is for another downturn after a decade of Randian economic thinking holding sway on Capitol Hill and in state legislatures across the country. Here are three factors which will make the next recession worse than it need be:
The Dismantling of Unemployment Insurance: The Republican Party has put attacks on the undeserving poor at the center of its electoral strategy, arguing that the government is too generous with programs like food stamps and unemployment insurance. At the state level, legislatures have taken a hatchet to unemployment insurance, and now a far smaller share of unemployed workers are receiving unemployment benefits than were at previous times of full employment. Whereas every state in the union provided at least 26 weeks of unemployment insurance for the half century leading up to the Great Recession, nine states now offer fewer, with Florida offering just 12.
Unemployment insurance is considered to be the most effective countercyclical tool at the federal government’s disposal, because putting money directly in the pockets of people who have lost their jobs is a really efficient means for blunting the effects of rising unemployment on the macroeconomy. The weakening of these programs in many states across the country will only make the next recession longer and more painful that it would otherwise be.
A Spent Federal Reserve: Once upon a time, free marketers could take refuge in Milton Friedman’s contention that countercyclical fiscal policy was unnecessary, because the Federal Reserve had all the tools needed to combat recessions. Any additional spending or tax cuts on top of that were just political tricks aimed at either bribing voters, or examples of politicians not letting a crisis go to waste and leveraging a recession to enact their preferred policies.
The last recession calls this entire world view into question, after near-zero interest rates were unable to jolt the U.S. economy into catch up growth, forcing the Fed to adopt a policy of sustained bond buying, the effects of which remain hotly debated. Whatever your feeling on the effectiveness of Fed policy, it won’t be able to repeat the 525 basis points in rate cuts it enacted the last time around, as it will likely only have raised the fed funds rate to roughly 3.25% by the end of 2020.
Political Polarization: 2008 was not a time of widespread agreement between Democrats and Republicans on economic policy, but ten years ago there was a chance of compromise between the two parties. Three Senate Republicans, after all, voted for the 2009 stimulus package—a level of bipartisanship one cannot expect for major legislation today.
If the economists polled by the NABE are right, and the coming recession strikes in the middle of what will be the most emotionally-charged presidential race in modern history, the chance that the two parties could come together on a coherent response to the crisis will be very low. Democrats will be tempted to obstruct Republican proposals for tax-cuts-as-stimulus, so that voters will be more likely punish Donald Trump and the Republican Party for their mishandling of the economy. If we are lucky, a divided Washington will pass a George W. Bush-style tax rebate for the middle class, a measure that will be welcome but likely inadequate for the job.
This drama will unfold amid already soaring budget deficits, resulting from an aging population and recently enacted corporate tax cuts. We’re likely not at a point where the bond market will lose faith in U.S. credit—the alternatives investors have to U.S. Treasuries are no better. But higher debt loads will sap investor confidence to a degree, crimping investment in the U.S. economy going forward and adding more fragility to an already unstable global financial system.
We’ve had ten years of sunshine in which to fix our fiscal roof and prepare for the next recession, by reforming and investing in the programs we rely on to fight recessions. Instead, Congress and state governments have been knocking down walls and chipping away at the foundation. The next recession will therefore serve as a wonderful natural experiment as to the effectiveness of Keynesian countercyclical policy—just pray you’re not one of the unemployed guinea pigs.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.