Don’t ask when the next recession will come. Trust me, nobody knows. I can tell you that the consensus — among those who don’t actually know — is at some point in 2020, probably in time to liven up the presidential election.
Democrats’ efforts to fight past recessions have been hampered by bipartisan concerns about increasing the federal budget deficit. President Donald Trump has helped to explode that tradition, thanks to his huge, deficit-busting tax cut focused on the rich and his recent promises of a second tax cut. When the next recession arrives, Democrats will have plenty of room to argue that the government should increase spending to juice the economy.
But to win that argument and save the economy from another major crisis, they’ll need to move past their longstanding fear of deficits and get money out the door to help struggling Americans.
What is a recession, anyway?
Let’s back up. First of all, what is a recession? The classic definition is two consecutive quarters of declining gross domestic product, which is the measure of the total value of all goods and services the economy produces.
Changes in GDP do not exactly coincide with changes in unemployment rates. Unemployment is what’s called a “lagging indicator,” which means it typically begins to rise at some point after GDP has started falling and a recession has commenced.
What are the political implications of a recession?
There are entire populations that, going by economic measurements typical of a recession, are always in “recession.” Unemployment levels considered to connote hair-on-fire disaster on a national scale are normal in minority communities and among unmarried women.
In the most recent “employment situation” release from the Bureau of Labor Statistics, national unemployment was a low 3.6%. Among African Americans, it was 5.4%. That gap is accepted as normal. In the same vein, among families with two married parents in 2018, at least 74.7% had at least one parent who was employed. Among families maintained by women (that means, without a spouse), only 62.9% had an employed parent.
The customary considerations around recession and unemployment are profoundly racist and sexist. The households that are financially underwater even before the bad times are disproportionately made up of people of color and headed by women.
There are different kinds of poverty. One kind is temporary. The other is more permanent and harder to escape — the sort of poverty in which many find themselves year after year, or generation after generation. And the number of people temporarily in poverty is greater than the number usually in poverty.
That means the economic significance of a recession is distinct from its political significance. In economic terms, a recession pushes many families into financial distress, but it has less impact on people who were already behind the eight ball. In political terms, a recession may mobilize a segment of the population that was otherwise quiescent. This segment is more white, male and Republican than the chronically disadvantaged, a factor that could weigh against Republican electoral fortunes and favor working class-oriented politics in 2020. Misery loves company.
Why do people believe the next recession will come in 2020?
The reason for pointing to 2020 as the next recession year is the abnormally lengthy recovery the economy has been experiencing since the Great Recession of 2008. In other words, it’s been so long without a recession, there must be one coming soon. That may not sound very scientific, but it’s actually the best that economists can do. Otherwise, you can find a cacophony of more or less equally informed commentary arguing one side or the other as to when, or if, a recession will come.
The periods between recessions began to lengthen after 1982, occasioning triumphant stories of a “great moderation.” Those voices went silent after the great immoderation of 2008. Moderation in this context is a positive thing since it means less fluctuation in a smoothly expanding economy. Fluctuation is undesirable because it’s disruptive and costly, both to families and to businesses.
There is a quasi-official nonprofit, the National Bureau for Economic Research, that determines the specific dates for the beginnings and ends of recessions. But economic data is only available with a lag. The upshot is that we are always in a recession before we are notified of it. We are never sure it’s coming.
What numbers should we actually watch?
There are some important ways in which the course of the economy may diverge from trends in the well-being of the working class.
In the broadest terms, growth in GDP and employment doesn’t necessarily translate into growth in wages, the main source of income for most of the population. Wages began diverging from productivity in the mid-1970s. U.S. wage growth has been anemic for decades.
Adding insult to injury, even higher wages alone will not fully support the needs of a household. Wages aren’t enough to enable a family to afford health insurance, for example. And a healthy public sector is necessary to provide the basics of safety and infrastructure, including roads in good repair and potable water.
A big flashing red-light distraction in all this is the stock market. The headline numbers ― changes in the main stock market indexes ― are of great interest to the small fraction of the population that owns stock. But trends in the stock market don’t mirror or foretell changes in GDP or wages. To be sure, a recession is not usually good for stock prices, but the wealthy can hire brokers who can make them money whether the market goes up, down or sideways. And of course, if you have a ton of money to begin with, you can always ride out a market decline.
How do you get a broadly shared recovery?
Although the unemployment rate is not terrible at the moment, many Americans’ jobs are precarious. The sorry record of wage stagnation means families have less financial cushion for the next downturn. On top of that, increasing numbers of baby boomers are facing retirement ill-prepared to support themselves. Unemployment benefits have been cut back in some states, and cash public assistance (“welfare”) has been decimated.
But with the deficit once again breaching a cool trillion dollars, the usual legion of deficit scolds has begun to warn us that thanks to Trump’s tax cut profligacy, the federal government will be disarmed in the face of the next recession, unable to spend more money or cut taxes in order to boost the economy.
I — and other economists on the left — would tell you that is wrong. Although unemployment is at a historically low rate of 3.6%, there is still slack in the economy. One sign of this is the fact that the ratio of employed persons to “prime-age workers” (which means people ages 24 to 54) still has a way to rise before it reaches the peak experienced in 2000.
In other words, there is no good reason more people could not be working. Higher employment could be facilitated by an increase in government spending — preferably paying for useful work, but also aiding those unable to work. The leading proposals in this vein are “job guarantee” bills championed by Sens. Bernie Sanders, Elizabeth Warren, Cory Booker and Kamala Harris (all candidates for the Democratic presidential nomination) and a similar measure included in Rep. Alexandria Ocasio-Cortez’s Green New Deal.
The government could spend money on a job guarantee without the need for immediate or imminent tax increases. How much money it could spend without raising taxes depends on the extent of idle resources in the economy ― those who are seeking work, those who could be drawn back into the labor force, and the dormant industrial capacity that could be fired up in the short term. There is a straightforward signal that shows the economy still has room to grow: the trend in wages.
The long-term stagnation of wages since 2008 (only recently showing a bit of an upturn) is the chief sign that employment is less than “full.” We will know the economy is reaching its limits as far as labor is concerned when inflation — of wages and other costs — starts to increase. The U.S. hasn’t seen excessive inflation for decades. But when it comes to pass, it signals the approach of limits on the expansion of federal spending. We’re not at those limits yet.
So what will Democrats do if they have to respond to a recession?
The fact that there’s room for more government spending doesn’t mean that Democrats will support such spending if they regain full control of the federal government. While much media attention has focused on the rising strength of progressives in the party, many newly elected Democratic members will be likely to identify with centrist “New Democrat” worries about public debt. Some of those members would have been Republicans in a different era.
House Speaker Nancy Pelosi hasn’t indicated that she’s willing to increase deficit spending. She has instead embraced a PAYGO doctrine — the insistence that no spending initiative may be considered unless it is attached to offsetting cuts to spending or increases in taxes. Adhering to that rule could kneecap any Democratic response to the next recession.
If there is a Democratic takeover in 2020, the fumes of anti-Trump ardor will quickly burn out and Democrats will have to govern. If they can’t get past their deficit-related hang-ups, that will be an especially difficult task.