2020 election

The Battle to Combat Recession Slowly Begins to Take Shape

Economists agree a recession is perhaps only months away. There is less agreement and discussion on how to combat the recession when it occurs. One think tank argues the cure is growing aggregate demand by addressing income inequality. [Illustration Credit: Ji Sub Jeong/Huffpost]

Economists agree a recession is perhaps only months away. There is less agreement and discussion on how to combat the recession when it occurs. One think tank argues the cure is growing aggregate demand by addressing income inequality. [Illustration Credit: Ji Sub Jeong/Huffpost]

The United States is enjoying its longest sustained economic expansion since World War II, but there are signs a recession could occur in the next 12 to 18 months. An emerging question is what weapons US policymakers will have at their disposal to combat an economic downturn.

Historically, the tools to dig out of recession have included higher spending, lower interest rates and tax cuts. However, those tools have been compromised and don’t have much headroom. Federal budget deficits are already at economic stimulus levels, interest rates remain low and taxes have been cut.

Many economists believe trade wars can tip US and global economies into recession and possibly make a recession deeper and longer. The Smoot-Hawley Tariff Act of 1930 is credited with adding to the economic strain of the Great Depression by constricting international trade, lowering the gross domestic product and forcing job layoffs. The escalating US-China trade war has moved from a negotiating tactic to a policy preference by the Trump administration, with profound impacts on manufacturing, agriculture and other business sectors in a far more globalized economy than the 1930s. 

The Republican tax cut in 2017, which largely benefitted corporations and wealthier taxpayers, has failed to generate a sustained stimulus as new business investment has stalled, in part because of uncertainty about disruptions in international trade and global supply chains. Meanwhile, Congress and the White House have agreed to a budget package extending past the 2020 election that will raise the deficit and national debt even more.

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President Trump has applied continuous pressure on the Federal Reserve Bank to cut interest rates faster and deeper. Critics charge Trump wants to extend the current economic recovery past the 2020 election, even if it risks longer-term economic problems.

One tried-and-true idea to stimulate the economy that rarely gets mentioned is an infrastructure investment package. There has been big talk from the White House to Capitol Hill about investments ranging from $1 to $2 trillion. However, talk breaks down when it comes to paying for such investments in roads, bridges, water systems, public transit and expanded broadband.

Political dialogue about the economy has become as polarized as other hot-button issues such as immigration, health care and gun legislation. As the threat of recession rises, more politicos, especially those appearing on the 2020 election ballot, will have heightened interest in reversing a downturn. That may account for the relatively sparse public discussion of fighting a recession when one next occurs. 

The Economic Policy Institute (EPI), a nonprofit think tank that promotes economic policies benefitting low- and middle-income workers, offers some perspective on how to approach the next recession. In a report issued in April, EPI argues for “an effective fiscal boost to aggregate demand growth,” adding, “Policies should be constructed not only to be effective economically, but also to be effective politically, in order to ensure broad and engaged popular support.”

The EPI report says, “A key lesson from the Great Recession is that fiscal policy is the most effective tool for aiding recovery. Monetary policy can lay the groundwork for fiscal policy, but really cannot be relied on to play more than a supporting role for fighting recessions.” Notwithstanding record deficits and spiraling national debt, EPI believes the United States has the “fiscal space” for a substantial stimulus package.

According to EPI, the United States is ill-prepared for a looming recession because it has failed to address income inequality during the historically long economic expansion.  Worsening inequality, it claims, has put a “drag on aggregate demand growth.” Spurring demand, EPI says, is what will get the country out of recession.

A fiscal stimulus in the form of an infrastructure investment or tax cut that seeks to grow demand by shrinking income inequality is likely to be viewed quite differently by Republicans who control the Senate and White House and Democrats who control the House and are running for President. Expect sparks to fly as political campaigns get into full gear this fall.

If predictions hold true and the 2020 election comes down to a handful of swing states, as it did in 2016, the debate over a fiscal stimulus, which EPI favors, or monetary stimulus, which Trump prefers, could be a key factor in who working-class voters support.

The US-China trade war is surfacing as a political talking point on the economy, as Democrats point out the toll tariffs are taking on American farmers, businesses and consumers. However, most of the leading Democratic presidential candidates don’t have a solid trade policy alternative, which makes a recession-fighting fiscal stimulus a more inviting option, especially on the campaign trail.