How to Prepare for the Next Recession
By BEN SPIELBERG
Washington — DESPITE solid job numbers, America’s gross domestic product grew by just 0.5 percent during the first three months of 2016, the slowest pace in two years. The current expansion is already longer than the postwar average, so it will be no surprise if policy makers begin asking, Is a recession lurking around the corner?
The answer, of course, is that no one knows. Economists can predict recessions as effectively as they can read your palm. What policy makers can do, however, is get ready for the next recession, whenever it arrives. And we need to act now, because we’re far from ready.
Historically, we’ve relied on the Federal Reserve Board to act as our principal recession fighter.
And it has done a pretty good job. Unfortunately, it won’t be much help next time. Because interest rates are already so low, the Fed’s principal ammunition — the ability to further lower rates — is unlikely to have much traction when the next downturn rolls around.
If we want to mitigate hardship and help the economy get back on its feet when that happens, the prudent move would be to strengthen the “automatic stabilizers” in the federal budget — programs like unemployment insurance, the Supplemental Nutrition Assistance Program, or SNAP (food stamps) and Medicaid — that, without the need for congressional action, expand when the economy is weak and contract when the economy is on its way to recovery. Such programs put money in the pockets of those who suffer most during recessions, money that will be quickly spent back into the economy, and they have an efficient administrative infrastructure in place that can be leveraged to disburse funds rapidly when the need strikes.
But as they currently stand, these programs aren’t enough. Consider SNAP. The 2009 Recovery Act temporarily increased the maximum monthly food benefit by about $63 a month for a family of three. In addition to raising consumer demand, this benefit expansion reduced hunger, and it kept nearly a million people out of poverty in 2010.
That expansion took congressional action and was temporary. It won’t happen again without similar action — which may not take effect in time. So before a recession hits, Congress should enhance SNAP to ensure that such an expansion kicks in automatically when certain economic indicators are breached. Its size should be tied to the severity of the downturn, and the increase would phase out once things improved.
One of the biggest challenges during a recession is at the state level — many states have balanced-budget requirements, which mean that as tax revenues drop, spending has to as well, making the recession more painful. The federal government can help by temporarily increasing the money it gives states to cover Medicaid, which would free them to plug other budget shortfalls.
Policy makers from both major political parties recognize the risks of inaction; Congress passed stimulus packages under the administrations of both George W. Bush and President Obama. In addition to increasing SNAP benefits, providing states with fiscal relief and enacting a Homelessness Prevention and Rapid Rehousing Program that served over one million people, the Obama stimulus funded about 260,000 subsidized jobs in 2009 and 2010.
But it would be risky to depend on the same wisdom to come through in the next crisis. And we need to do more, too — for example, the government should create a permanent employment fund that would enable states to both build their own subsidized jobs programs and take advantage of fully funded national service jobs that the federal government would directly create.
During normal times, this fund could target populations, like the long-term unemployed or people with criminal records, who typically struggle in the labor market. When a recession hit, the fund would offer the infrastructure necessary to meet rising job-creation needs.
We could also improve our unemployment insurance system, which eight states, including big ones like Florida, Michigan and North Carolina, have undermined by restricting eligibility or cutting benefits, or both, in recent years. The federal government should require all states to offer at least 26 weeks of benefits in their basic programs and to expand coverage to a broader group of workers, including part-timers.
It should also improve triggers, based on job market conditions, that turn additional weeks of benefits “on” during downturns and “off” again during recoveries. Without such effective automatic switches, Congress has had to enact “emergency” unemployment insurance expansions during or after every recession since 1970.
There’s ultimately no way to know when the next recession will hit. But if we begin to prepare for it now, we’ll be a lot more ready for it when it does.