The United States is due for a recession. But if it arrives too soon, we may not have the tools to fight back.
Not once in the full sweep of history has the United States gone more than 10 years without a recession. We’re seven years into our slow but steady recovery, which means one of these two things must be true: Either we’re on track to break the record for the longest period of sustained economic growth, or there will be a recession under President Donald Trump.
Even if you lean toward optimism, it’s still best to steady yourself for the unexpected. And right now, the United States is unusually unprepared — bereft of the resources governments traditionally use to limit the crippling effects recessions can have on workers, businesses, and struggling families.
In general, there are two time-tested strategies for beating back a recession: cut interest rates or give people more money. Right now, both approaches are compromised.
Start with the rate cuts, which would be overseen by the Federal Reserve.
For two generations, the Fed has taken the lead in the fight against recessions, acting more quickly than Congress and aided by a tool as powerful as it is reliable: the federal funds rate. By lowering that one target, the Federal Reserve can spur investment, encourage spending, and turn the economy around.
But to have a big impact, you need big rate reductions. Ideally, when a recession hits, the Federal Reserve would be able to cut the federal funds rate by 4 to 5 percentage points. That’s what it did during the slowdown in 2001 and again in 2007-2008.
But cuts of that size are impossible today, because the federal funds rate is already close to zero, at around half a percent. And while there’s still time for that to change — including at the Fed’s December meeting, where it’s expected to raise rates a quarter point (the first increase since last December) —there isn’t a single member of the Federal Reserve board who expects the rate to breach 4 percent in coming years.
When the next recession hits, the Fed is likely to be stuck — unable to cut rates as much as it would need to combat the economic contraction.
Now, it’s true that there are alternatives, other approaches the Fed could take to help mitigate the impact of a recession. For instance, it could try a larger version of the bond-purchase program that was used after the Great Recession, or perhaps experiment with negative interest rates — charging banks a small fee whenever they want to store money.
Trouble is, the further you move from the established playbook, the greater the uncertainty. When the Fed reaches for exotic instruments, their precise impact will be harder to predict and potentially more difficult to control.
This is where, theoretically, Congress could ride to the rescue with its own plan to stoke a recession-plagued economy by giving people money to spend. Maybe in the form of tax cuts, maybe via a jobs program, maybe by mailing out checks.
It’s not unprecedented. Congress played a vital role in the fight to end the Great Recession, with a roughly $800 billion package of tax cuts and spending initiatives bundled together as the American Recovery and Reinvestment Act.
Next time around, however, it may be harder to mobilize congressional support. Partly that’s because Republicans now control both branches of Congress, and they tend to be more skeptical of the virtues of deficit spending. Even now, many Republicans deny that the American Recovery and Reinvestment Act produced any benefits, despite a fairly broad consensus among economists that it helped.
What’s more, Trump seems ready to use up his recession-fighting ammunition before the enemy even comes into view.
Among the top priorities of the incoming Trump administration are large tax cuts and a burst of infrastructure spending, both of them costly endeavors that are likely to increase the federal deficit.
Pursuing this kind of deficit spending now, when we’re already near full employment, could push the US economy into overdrive — which isn’t necessarily bad. Among other things, it could help push wages up, speed the Federal Reserve’s efforts to raise interest rates, and give the economy enough resilience to shake off otherwise dangerous shocks.
But engaging in deficit spending before a recession arrives only makes it harder for Republicans to stomach more debt-swelling stimulus when a recession does come and the economy really needs it.
One way or another, that’s going to happen. Eventually, there will be a trade war, a contagious slowdown in China, a devastating natural disaster, or some other unexpected economy-stalling event. We may not know exactly what or when, but given that our current economic recovery is already among the longest in US history, you can bet that a recession is out there.
For that reason, it’s important for lawmakers to be prepared, with all their recession-fighting tools sharpened and ready at hand. Today, most of them are either blunt or missing.