The Return of the Recession

(Disclaimer: I am no PhD, I just like reading and writing about economics. I will cite as much as I can so my writing at least has a semblance of merit.)

“Urban street with boarded up decrepit houses and light poles under overcast skies” by Echo Grid on Unsplash

With the Great Recession still fresh in the minds of many Americans and a full recovery still incomplete, there is little thought going into the likelihood of another one. Like back-to-back hurricanes making landfall, the next recession may be the second of a one-two punch on the country’s vulnerable middle-class.

The country has now gone through three consecutive jobless recoveries, with downturns tending to amplify long-existing trend to hollow out the middle class, polarize the labor market, and hit already ailing regions hard. It seems likely that the next recession will do much the same.

Annie Lowrey, The Atlantic

More than ten years after the beginning of the Great Recession, the scars left on the American economy still remain. Median wealth is still down 34 percent from pre-recession levels, the labor force participation rate is close to a 40-year low, the labor market took until July 2017 to fully recover, and the share of GDP that goes to wages is still near pre-recession lows.

Worse yet, places hit hardest by the Great Recession may never fully recover. From rural towns in America’s heartland to the suburbs and exurbs of America’s metropolises, millions have been left behind.

Although the unemployment rate is now below 4 percent, many working-age people across the country have simply stopped looking for a job. Some economists attribute the slow recovery to reduced dynamism or a slowing of start-up business creation, but regardless of the reason, the effects have left a hole in the middle class, particularly in rural areas and for those without a college degree.

While the middle class continues to struggle, the upper class is prospering. Congress passed a tax cut that disproportionately benefits the rich, the stock market is booming, corporate profits are at record highs, and top earners have captured most of the income growth since the end of the Great Recession. President Trump seems to judge the health of the economy on how well the stock market is doing, but is that really accurate?

We are in a vulnerable position right now. While the issues of middle calss workers beinng left behind persists, the cyclical nature of a capitalist economy means that the longer an economic expansion lasts, the more likely that tides are going to turn. The government continues to run a massive budget deficit even though the economy is near full employment. Ideally during a period of sustained growth like today, we would run a surplus to pay off some of the national debt, which costs the country 7 percent of the federal budget in interest payments. The high deficit leaves little room to fund government spending needed to lift an economy out of a recession like the stimulus package of 2009.

In addition, only eight states have a large enough rainy day fund to offset budget shortfalls that happen as a result of a recession. Without a rainy day fund, a state’s options are to raise taxes or cut services — neither of which are beneficial during a downturn.

Policymakers wield all the power to alleviate the effects of a recession on the American public. If they respond quickly, millions of Americans could avoid job loss, defaulting on debt, foreclosures, bankruptcy, and unnecessary hardship. Unfortunately, the current political environment does not instill much confidence that in a time of crisis Congress can band together and decisively pass effective legislation.

The last recession was set off by a mortgage debt bubble; the next one may be triggered by a corporate debt bubble fueled by stock buybacks, dividends, cheap debt, and tax cuts. Even household debt is rising again, further increasing the risk of a crisis and putting families in the crosshairs. Lastly, student loan debt continues to rise driven by the skyrocketing cost of higher education and increased reliance on student loans to pay for it. Will that be the trigger?

The tinder is set — all that’s needed is a spark.

Economics but not an economist; food but not a foodie

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