If a recession is coming, what should we do? Short answer: Not what President Donald Trump and his economists are thinking about.
While there is no certainty that a recession is in the offing, a number of Wall Street economists see warning signs — especially an inverted yield curve for bonds, which means that short-term rates are higher than long-term rates. This is not an infallible indicator, but it has often preceded a recession.
The economists also note that the current economic expansion is unusually long, more than 10 years. There is no economic law saying that expansions die of old age, yet neither is there any reason to believe that the business cycle has been repealed. We are going to have a recession sooner or later.
The Federal Reserve is doing what it can to forestall a recession — it has already cut short-term interest rates and is likely to do so again at its next meeting. But that can do only so much when the world economy seems on the brink of a downturn. Other countries like Germany and China are slowing rapidly, and contagion is a real possibility.
Good reasons to support open trade
Add to this the disastrous effects of the administration’s trade policy, which is weighing heavily on the stock market, and you have a recipe for recession that seems unavoidable. It’s worth remembering that the Great Depression was aggravated by the Smoot-Hawley law that raised tariffs on U.S. goods, provoked foreign retaliation and accelerated a worldwide chain of decline. That’s a key reason why presidents of both parties have supported open trade instead of protectionism — until Trump.
Predictably, Trump administration economists deny that there is any recession on the horizon, even to the point of simply denying the existence of economic data showing otherwise. But at the same time, they are preparing for a recession just in case. A temporary cut in the payroll tax and a cut in the capital gains tax for ultra-wealthy investors have been discussed.
“I would love to do something on capital gains,” Trump said Tuesday. “Payroll tax is something that we think about and a lot of people would like to see that.” But he added Wednesday that “I’m not looking at a tax cut now. We don’t need it.”
Let’s hope that view prevails, and not just for now. We have considerable experience with tax cuts as a tool to counter recessions, and all of it shows that they are very weak. One problem is that taxes automatically fall sharply in a recession as workers are laid off and business sales collapse. President Barack Obama supported a large tax cut in the 2009 stimulus bill, including a cut in the payroll tax, and it had a modest impact on growth. But even that would be unlikely in today’s very different economic conditions. More recently, the 2017 tax cut that Republicans said would jump-start the economy has completely run out of steam.
Get serious about Infrastructure Week
Doing more of what doesn’t work is unlikely to save us from an economic storm. However, there are two things that we could do now to soften the blow of a recession and prevent a rerun of the Great Recession.
First, Congress should enact a big public works program. Trump has been talking about doing one for more than two years, and Infrastructure Week has become a standing joke (Trump personally derails each attempt with unrelated controversies). God knows, there are a vast number of roads, bridges and schools desperately in need of renovation and repair. These projects should have been funded long ago.
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In addition, the evidence of global warming is becoming too obvious for even Republicans to continue dismissing. Rising sea levels and more intense storm activity mean increased flooding. We need a crash program of sea walls, drains and other methods of dealing with it — before disaster strikes. We also need a huge boost for research and development to devise technological solutions to the problem of warming and ways of coping with it.
Second, we should put in place now a program to automatically aid state and local governments when the downturn comes. Because they operate under a balanced budget constraint, they are forced to raise taxes and cut spending during a recession, which makes it much worse. This is one reason why the Great Recession was so deep.
Republicans should back public works
Some may ask how we can afford to spend the hundreds of billions of dollars these initiatives would cost. The answer is, how can we afford not to? In any event, interest rates on Treasury securities are extraordinarily low — about 1.5% over the next 10 years. This is practically free money given that inflation is running at a higher rate.
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Once the recession begins, public works become much less effective because it takes time to actually break ground. There are far fewer “shovel ready” projects in the pipeline than policymakers imagine. This was proven during the Obama administration, which did all that was humanly possible to speed them along, without much success.
I am old enough to remember when Republicans supported public works as a “supply-side” policy that would raise long-term economic growth. After all, it was Dwight D. Eisenhower who gave us the national highway system. It would be foolish of them to dogmatically insist on repetition of a failed tax cut effort if they are really concerned about stopping a recession — and saving their political necks!
Bruce Bartlett was an economist in the Reagan White House and at the Treasury Department. His 2009 book, “The New American Economy: The Failure of Reaganomics and a New Way Forward,” is a history of economic stimulus programs since the 1930s. Follow him on Twitter: @BruceBartlett