Have No Fear, the Recession is Near

 The Federal Reserve in Washington, D.C. ( Image )

The Federal Reserve in Washington, D.C. (Image)

 

For the past decade, the United States government has feared another recession. The 2008 slump, the worst since the Great Depression, wreaked havoc on the housing market. Americans largely chose to pay off accumulated debts rather than purchase homes, especially in the wake of mass foreclosures. The recession similarly affected banks and the private sector, as businesses had newfound tendencies to avoid borrowing or investing. To combat this economic stagnation, however, the government chose to pursue a path of expansion. From 2008 to 2015, both the Federal Reserve and federal government leveled off spending, but more recently, the Fed began to raise interest rates slowly, reaching a targeted 2.25 percent as of now. This policy of quantitative tightening, while sensible in theory, runs the risk of slowing down economic growth and enabling a recession.

Despite the seemingly prudent decision, congressional leaders and President Trump still fear a small recession caused by the rising target interest rates of the Federal Reserve. The anxieties plaguing elected officials have led to a near-constant government stimulus focusing on expansionary fiscal policies. The fiscal policies implemented by the United States federal government, such as continual deficit spending and the recent 2017 tax cuts, have indeed helped stimulate the economy. Gradual but continual growth has persisted, but it is mainly due to economic stimulus. While constant growth may appear to be the ideal outcome, in reality it is merely avoiding the necessary preparations for the inevitable recession.

 Brooklyn residents in line for a job fair in 2010 ( Image )

Brooklyn residents in line for a job fair in 2010 (Image)

Analysts predict that the United States could veer into a recession by 2020. The Federal Reserve’s quantitative tightening will decrease companies’ access to cheap loans in the short run, but in the long run, it will prevent over-leveraging within banks and corporations, leading to a stronger and more sustainable economy. Despite these long-term benefits, President Trump and other leaders of the country have criticized these monetary policies, wary of the political blowback of a recession.

Furthermore, as the most recent budget agreement shows, Congress is still engaging in a heavy deficit spending model.  These policies will allow for economic growth to continue in the short run but will only make the eventual recession more severe. The US will be unable to respond effectively, as the conventional economic policies embraced to stimulate the economy will have already been used. Thus, it is critical for the government to change course on fiscal policy before time runs out.

By maintaining unsustainable expansionary polices, the federal government has exhausted all conventional recession policy options, making them ill-prepared for the next inevitable downturn. Ultimately, the US must change its outlook on the eventual recession. While the repercussions associated with the most drastic of economic downturns are often too ominous to grasp, the government would do well to accept that it is merely a part of the business cycle. Instead of trying to prop up an economy that is expanding through deficit spending, Congress and the Fed must enact a more austere fiscal policy during this period of economic expansion allowing the United States to weather any recession that comes its way. The President and his peers should not fear the inevitable recession, but accept it and prepare for the worst pain while they still can.

 
NationalSam PritchardComment