Senator Elizabeth Warren is arguably the most economically savvy of the Democratic presidential candidates.
Long before she was elected to office, the Massachusetts senator warned early and often about the dangers of subprime mortgage lending, which played a starring role in the 2007-2009 financial crisis, when borrowers who never should have gotten a loan in the first place began defaulting in droves.
After the meltdown, she laid out the rationale and role for the Consumer Financial Protection Bureau, which was created to police the financial low-lifes that try to prey on us daily. (Sadly, the Trump administration has neutered the CFPB.)
But I was disappointed on Monday when Warren posted a missive on the website Medium saying a recession is looming and explaining how she has a plan (actually, several plans) to ward off the threat.
Her heart is in the right place, but the post, titled “The Coming Economic Crash and How to Stop It,” relies on some fear-mongering and a few debatable assertions. Good politics, perhaps, but I give the Harvard law professor’s paper a C. Here’s why.
1. Not all recessions are created equal.
The Great Recession was a true “crash” — the economy shrank dramatically over 18 months (down 5.1 percent peak to trough) and a lot of people lost their homes and jobs (peak jobless rate: 10 percent).
But that doesn’t mean the next downturn will be as severe. It could be more like the recession that followed the dot-com bust, which lasted half as long, and saw the economy dip just 0.3 percent, and unemployment reach 6.3 percent.
“I see a number of serious shocks on the horizon that could cause our economy’s shaky foundation to crumble,” she wrote.
No recession is good, but the senator almost makes it sound like we are the next Venezuela.
2. Not all recession triggers are created equal.
Warren highlights three trends that spell potential disaster: a downturn in manufacturing, high consumer debt, and high levels of corporate borrowing.
Yes, manufacturing has declined for two straight quarters, but that happened as recently as 2015-2016 without a recession, said Megan Greene, an economist and senior fellow at Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School. Why? Because manufacturing accounts for just about 11 percent of gross domestic product, according to the Federal Reserve Bank of St. Louis.
Yes, consumers are carrying a lot of debt, but the ratio of that debt to GDP or income is down from 2008, Greene notes, adding that defaults on student loans and car loans don’t have the power to cripple the economy the same way as mortgages did last time around.
But Warren is right to worry about corporate debt, including so-called leveraged loans to companies with low credit ratings.
3. Recessions are inevitable.
While the economy has expanded for 121 straight months — the longest in US history — we have not figured out how to eliminate the business cycle. At some point, the economy will run out of gas.
As Warren herself points out, three-quarters of forecasterssurveyed by the National Association of Business Economists expect a recession by the end of 2021. According to the survey, 42 percent say the economy will contract next year.
Meanwhile, her policy prescriptions — boosting the federal minimum wage to $15 an hour, tighter regulation of leveraged loans, revitalizing manufacturing — are no sure thing.
Ironically, Warren’s campaign (and those of the other Democratic candidates) would benefit if a recession were to hit sooner rather than later.
If the economy holds up into 2021 — the Federal Reserve has signaled it will cut rates as insurance — President Trump could run for reelection claimingrecord growth and low unemployment.
But a downturn before November 2020 could set up conditions similar to those that sank George H.W. Bush’s bid for a second term in 1992.
As I wrote in December, Bush inherited the Reagan bull market and continued economic expansion. But growth gave out in mid-1990 and contracted in the final quarter of that year and the first quarter of 1991. By the time data showed the economy was improving, it was too late.
Timing, in politics as in all things, is crucial.