On Monday, the Atlanta Federal Reserve put out a scary number: 0.6 percent. That is how fast it estimates the American economy grew in annualized terms in the first three months of the year — barely above stall speed. Maybe it is a blip. Maybe it is a slowdown. Maybe it is the start of a recession. We won’t know for months, as more data trickles in. But we do know this: If it is a recession, we are not ready for it. Not at all. Which means it might be much worse than it has to be.
This is the worry now quietly obsessing many policymakers on both the right and left in Washington, particularly as the goat rodeo that is the 2016 presidential election drags on. The concern boils down to this: In the event of a significant downturn, there are two main things the government can do to help the country through it. It can increase the deficit through tax cuts and spending increases, and it can reduce interest rates and encourage businesses to lend. In the Great Recession, it did both. In the next recession, it might be unable or unwilling to do either.
Let’s take that latter set of policy changes first. During the Great Recession, Ben Bernanke’s Federal Reserve slashed short-term interest rates all the way down to zero. Then, it started buying huge amounts of bonds to bring longer-term interest rates down and to boost asset prices. This worked really well: That latter policy alone, called “quantitative easing,” increased real GDP by 1.5 percent as of the first quarter of 2015, according to one estimate.
But the Fed had a lot of room to bring short-term interest rates down back then, given that the federal funds rate was at 5.25 percent. Today it is close to nothing. The Fed could experiment with pushing interest rates into negative territory, as banks in Japan and Europe have done. But the results have thus far proven less than spectacular. Quantitative easing has diminishing returns, too. The Fed has already boosted asset prices really high. It has already brought longer-term interest rates very low. More quantitative easing would do something, but perhaps not much.
There are other policy actions that the central bank could take. It could “helicopter drop” money into households’ bank accounts. It could cap the yield on government bonds, added Richard Clarida of Columbia University and bond giant Pimco, speaking at a Brookings Institution confab on the topic held last week. “You might think the Fed did everything and the kitchen sink, but in the last crisis, it didn’t explicitly peg the ceiling yield on government bonds,” he said.
But the general consensus among economists is that even with these yet more unusual policies, the Fed would likely be less effective than it has been. “You might try some of the stuff that has not been tried yet, but there is a reason it hasn’t been tried yet, because folks didn’t think it was going to be as good as what they were doing,” said Jon Faust of Johns Hopkins University at the Brookings event.
That leaves fiscal policy: slashing taxes and boosting spending to get people working again. Here, there are some issues around capacity, too. The United States has a heavier burden of debt than it did when the Great Recession hit, raising the question of whether yet more borrowing would raise interest rates and crowd out other government spending down the road. “We know that lower debt is better than higher debt, and we know a slighter trajectory of debt is better than a steeper trajectory of debt,” said Wendy Edelberg of the Congressional Budget Office at the Brookings event. “We can make those qualitative statements, but it is hard to know when investors might lose confidence.” But let’s put that concern aside, given that investors certainly are not punishing the United States now. (Heck, Japan’s debt-to-GDP ratio is more than twice ours, and investors are paying its central bank to borrow.)
No, here the issue is much more of will than capacity. Some stimulus spending happens automatically when a recession hits. More workers file for and receive unemployment insurance, for instance. More families become eligible for food stamps. That obligates the government to spend more. But on top of that automatic countercyclical spending, the government generally piles on additional stimulus, like it did with the recession-fighting American Recovery and Reinvestment Act. And last time around, that near-trillion in extra money really helped, saving 2.6 million jobs and raising real GDP by 3.3 percent as of 2010.
When the next recession rolls around, there might be the need for Congress to do the same. And there are many good options: rebuilding roads, bridges, and train lines; adding additional weeks of unemployment benefits and boosting food-stamp payments; subsidizing local job-creation initiatives. “If we have this ongoing structure in place during normal economic times, then when the next recession rolls around, Congress can do much more efficient stimulus,” said Ben Spielberg from the Center on Budget and Policy Priorities, who has written a paper with Joe Biden’s former economic adviser Jared Bernstein on best practices for the next recession.
But this is the Congress that keeps on trying to repeal Obamacare. This is the Congress that wants to gut the social safety net, slashing spending on programs for lower-income families by 42 percent as of 2026. This is the Congress that wants to amend the Constitution to require balanced budgets. This is a Congress dominated by a party that insists that stimulus failed, despite all of the evidence to the contrary.
I suspect this is a Congress that would refuse to fight the next recession in the ways that would really work. We might end up with tax cuts for the wealthy instead of targeted, subsidized job creation. We might end up with hundreds of billions of dollars less spending than the economy needs. At the same time, the Fed would be out of its strongest ammunition. In a worst-case scenario, that could mean an ineffective fight against the recession — a deeper and longer downturn, higher unemployment, more poverty, more misery.
That is, of course, not to say that there is nothing to be done, and that if that Atlanta Fed reading ends up being right that we should resign ourselves to a tough downturn and a sluggish recovery. There’s an election coming up, after all.