by Emma Dahl
Associate Program Analyst | ABetterEconomy.org
I’m anticipating that the next recession will come sooner rather than later. Institutions from Fox to Vox have also suggested that another recession may be on the way. While recessions are a natural part of the business cycle, the government has the ability to soften the blow of recessions via a few different policy levers. However, it looks like the various economic and fiscal policies that the government has instituted in the last few years and are currently enacting are not preparing us for the next recession.
The economy is doing very well currently, and the government is supporting expansionary policies like tax cuts and increased spending. While this is leading to more growth now, it also means that there is less money in the government’s pocket. When we hit the next regression and they want to spend more money to help the economy, they won’t be able to do as much because they have already enacted these expansionary policies.
A recession means that the economy is slowing: unemployment increases, and GDP growth and housing prices both decline. By adjusting government spending, interest rates, and taxation, the federal government can decrease the severity of a recession. Based on the current mix of spending, taxation, and interest rates, it looks like they aren’t going to be prepared for the next recession.
The government is currently engaging in deficit spending for increased military costs and mandatory spending (social security, medicaid, etc), which is fueled by reduced revenue from tax cuts . Essentially, the government is bringing in less revenue but spending more.
One way that the government can prepare for a recession is by reducing government spending. This serves the purposes of slowing the economy and decreasing the deficit. Part of what causes a recession is when an economy overheats and people have more money in their pockets, so they spend more and save less. This can lead to higher inflation.
Reducing government spending normally means cuts to discretionary government programs (as opposed to mandatory spending on things like Social Security and Medicare). The discretionary section of the budget is mostly defense spending. If the government were to reduce discretionary spending now, they could slow the economy and reduce the severity of the next recession.
Mandatory spending could also be cut, but this is more difficult to change. If the government spent less now, when the next recession hit, they would have more wiggle room to increase spending. Instead, if the government wants to increase spending during the next recession, they will need to either increase taxes or engage in more deficit spending, both which have the potential to further slow the economy.
Another way that the government can prepare for a recession is by increasing taxes. When the economy overheats, higher taxes can slow spending and decrease the impacts of the resulting recession. Additionally, when more tax money is brought in during an expansionary period, it gives the government more wiggle room to cut taxes when the economy isn’t doing as well later. Tax cuts now means no tax cuts during the recession.
Taxes and Spending
In addition to the issues that tax cuts and increased spending will cause independently during the next recession, they also have another combined impact- an increased national debt. When the government brings in less money from taxes and also spends more, this expands the national debt. Check out this article from the Committee for a Responsible Federal Budget on the consequences of a growing national debt.
Interest rate cuts
When a recession hits, another way to increase spending is to lower the interest rate. When people make less from investments, they are more likely to spend more of their money. This also incentivizes businesses to purchase more equipment because of the lower cost of borrowing money. In the aftermath of the ‘08 crash, the interest rate fell to less than 0.1% and has been returning to a normal rate, but in my opinion it isn’t high enough to be dropped again as a policy lever. Although the government does have some influence over the fed, it’s not a direct chain of command, and the low interest rates are mostly a reflection of the financial sector still recovering from the last recession.
What should you do to prepare?
Although big decisions like tax cuts and increased spending aren’t something that we as individuals have much influence over, there are a few things you can do to prepare yourself for the next recession. I’m estimating that the next recession will come some time in late 2019 or 2020, so make sure that you either take out investments soon if you are planning on using that money soon, or be prepared to sit on them for a few years.
Unemployment also tends to increase during a recession, so keep a few months worth of emergency money easily accessible (this is a good idea at all times, not just for recessions). Because the economy is still doing well for now, it may also be a good idea to get ahead on any mortgage/ credit card payments you have.