Here’s Why We’re Not Prepared for the Next Recession

Here’s Why We’re Not Prepared for the Next Recession


When will the next recession hit the economy? Nobody knows for sure, but we can be certain that sooner or later the economy will experience another downturn. When that happens, will monetary and fiscal policymakers have the ability to respond effectively? 

The inevitability of another recession is evident in a graph of the unemployment rate. Notice that, before 1970, it was common for the unemployment rate to reach a low point and then hover around that point for several years. For example, the unemployment rate was around 4 percent for an extended period in both the mid to late 1950s and 1960s. But since 1970 the unemployment rate has behaved differently. Instead of reaching a low point and then leveling off for a period of time, it has tended to “bounce” off the low point and almost immediately begin rising again. 

Related: Killing Banking Rules Will Invite a Whopper of a Recession  

Even during the period known as the Great Moderation from 1982 – 2007 when recessions were less frequent, unemployment was, for the most part, either rising or falling. There was one period in the late 1980s when the unemployment rate stabilized at a bit over 5 percent for approximately two years, and the two subsequent periods in 2000 and 2006 that lasted approximately a year, but for the most part since 1970 the unemployment rate has almost always been either going up or going down. 

The question is, if we are at or very near a new low point for the unemployment rate, how long will it last before it begins rising again? One year? Two years? Will this time be different? 

This is not a prediction that a recession is just around the corner. It’s possible that unemployment will stay low for several years before the next recession cycle starts. Instead, it’s a warning that we need to be ready in case a recession does hit relatively soon, as it well could. 

The problem is, we aren’t ready. Even a year or so from now, the Fed’s target interest rate won’t be high enough to leave much room for cuts in response to an economic downturn. And if Janet Yellen is replaced as Fed Chair when her term ends early next year, as looks very likely, a Fed chair appointed by a Republican administration and backed up by at least three Trump appointed Board members is unlikely to engage in quantitative easing and the other creative ways the Fed tried to stimulate the economy when its target interest rate couldn’t be cut any further. 

Related: Will Trump Continue the GOP's Recession Curse? 

Maybe I’m wrong that hypocrisy doesn’t seem to bother Republicans these days. But criticism from the right over the Fed’s quantitative easing policies, which was related to fears of inflation that never materialized, was loud and widespread on the political right. Without much room to cut interest rates, and without support from the Trump Fed for other stimulative measures, there’s little the Fed will be willing and able to do in response to economic problems. 

As for fiscal policy, when the recession does hit the economy keep your fingers crossed that Congressional gridlock stops Republicans from making things worse. During the Great Recession, Republicans made it very clear how they will respond when millions and millions of people lose their jobs and need help. First, they will use the recession as an opportunity to argue for their favorite policy, tax cuts for the wealthy. 

Republicans will claim that this helps to cure a recession, but there’s little evidence to back this up. In any case, there are much better ways to stimulate the economy, e.g. tax cuts for lower income households who will spend rather than save the money, social insurance that helps people survive until the economy improves, and government spending on infrastructure and other things. 

Related: Special Report: How the Federal Reserve serves U.S. foreign intelligence 

The other thing that Republicans made clear is that they will use the inevitable increase in the deficit that occurs in a recession to argue for austerity – cuts to government programs. In a recession, spending on social services goes up as more people are in need, and tax revenues fall due to lower incomes, both of which cause a temporary increase in the government deficit. 

There was no indication from financial markets that the government debt load was worrisome during the Great Recession if financial markets were worried interest rates on government debt would have spiked. But during the Great Recession, Republicans used fear of rising debt and the threat of a government shutdown to force through cuts to government programs. Unfortunately, this was the opposite of what needed to be done, cutting government spending in a recession makes things worse, not better. But the argument did allow Republicans to take a step towards their goal of a meaner, leaner government. Once again, maybe they will hypocritically respond differently if a recession comes under a Republican president, but it’s hard to imagine today’s Republican Party giving up on its political goals for the sake of the economy and the needs of the working class. 

Our best hope is that the economy remains at full employment long enough for the Fed to restore its ability to cut rates and that Congress is gridlocked when the downturn comes (or that midterm elections somehow bring some sanity). If a recession comes before the Fed is ready, there will be millions and millions of people in need of help that won’t arrive. Even worse, if Congress overcomes gridlock and pursues austerity as a way of achieving its ideological goals under the false cover of helping the economy, it will prolong the recession and unnecessarily hurt millions more. 

It would be hard to be less prepared for a recession than we are right now.