BEYOND THE NUMBERS
The economy is in the 124th month of the longest expansion on record, and while expansions don’t die from old age alone, fears are rising that a recession may be on the horizon. Recessions can hurt workers and their families in many ways, so policymakers should try to make them as short and shallow as possible. That means temporarily shelving longer-term deficit concerns and enacting anti-recessionary fiscal measures — namely, targeted spending increases and tax cuts — that raise deficits in the short term.
Recessions can cause lasting economic and social harm, as this International Monetary Fund analysis documents:
The human and social costs of unemployment are more far-reaching than the immediate temporary loss of income. They include loss of lifetime earnings, loss of human capital, worker discouragement, adverse health outcomes, and loss of social cohesion. Moreover, parents’ unemployment can even affect the health and education outcomes of their children. The costs can be particularly high for certain groups, such as youth and the long-term unemployed.
Effective fiscal stimulus in a recession can reduce the risks of such harm and will be especially critical at a time when monetary policy has far less room to act than in the past. Interest rates are already so low that policymakers can’t cut them much further to boost consumer and business spending and prevent an incipient downturn or, failing that, lessen its impact.
Policymakers shouldn’t let claims that the United States lacks the “fiscal space” to absorb more deficits and debt without precipitating a financial crisis deter them from acting. As Congressional Budget Office (CBO) Director Phillip Swagel explained recently, “[W]hen there’s a financial crisis and a recession . . . countries that respond with expansionary policy do better. And it looks like the United States has the fiscal space to do that, right? Interest rates are low. The federal government is able to borrow. So [the debt situation] is not an immediate crisis. . . . It’s a long-term challenge.”
Former CBO head Douglas Elmendorf made much the same point:
As fears of imminent recession have climbed in recent weeks, many are warning that the U.S. government does not have the budget capacity to mount an effective response to an economic downturn. . . . That concern is misguided: Yes, we have a serious long-term debt problem, but no, that problem does not make anti-recessionary budget policy impossible or unwise. . . . We have plenty of capacity in the federal budget to undertake vigorous countercyclical tax and spending policies when the next recession arrives. Given the economic and social costs of recessions, we should undertake such policies.
Ideally, we should already have robust fiscal policies in place that automatically boost spending and mitigate hardship in a downturn and expire once the economy has improved. As Jason Furman, who chaired the Council of Economic Advisers under President Obama, argues:
Based on the current economic situation, stimulus isn’t yet warranted — but it may be soon. Given the uncertainty, Congress should pass a law immediately that would automatically trigger stimulus if the labor market deteriorates, with unemployment rising rapidly. . . . These economic interventions would occur only when needed, unlike the needless stimulus from tax cuts and spending increases in 2018. They would also last as long as needed, unlike the stimulus that was cut off prematurely in 2012 despite an unemployment rate still at 8%.
The United States has a long-term fiscal challenge, not an immediate debt crisis. Deficit and debt concerns should go on the back burner when it’s time to fight a recession.