Waiting for the spark that sets off the new recession

Photo by Rick Tap on Unsplash

Lately, the stock market has been on a wild ride. In October, the Dow dropped so far that all the gains of 2018 were erased. A brief recovery followed, but as of a few days ago, we are again in negative territory for the year. Indeed, when I checked earlier today, all three stock indices are down.

How could this be? To listen to Donald Trump, everything is great. But the stock market is not so convinced. In fact, they are very concerned about the economy’s near-term and longer-term future.

In the short term, economic indicators are all pointing toward recession. The recent jobs report was disappointing, and highlighting this trend was GM’s announcement that it was laying off 14,000 employees. The yield curve, which compares short-term with long-term interest rates, has become extremely flat, indicating that investors are concerned about the future. For most of this year, economist Robert Schiller of the famed Case-Schiller real estate index has warned that we are in another housing bubble. In fact, this is currently the third highest bubble since 1913, the first, of course, resulted in the 2008 Great Recession. And the only reason this housing bubble has not gone higher is that real wages have not risen enough for most people to afford to buy expensive homes. Indeed, economists have been predicting a recession by 2020 for some time now.

In the short-term, concerns over trade resulting from Trump’s ill-advised trade wars and his cavalier attitude about tariffs is extremely destructive. Remember the extent to which economic performance is psychological. If businesses become concerned about the long-term, they will reduce their investment, plunging the economy into recession. Thus business fears over trade uncertainty is not a theoretical concern.

What’s more is since we started recovering from the 2008 recession, we have been on one of the longest periods of economic growth in our history. Periods of growth do not last forever. The natural ebb and flow of the business cycle means that there will be periods of expansion and periods of recession. The goal of policymakers for the last few decades has been to reduce the severity of recessionary periods while controlling inflation during expansions. Nobody has credibly argued that the business cycle can be eliminated, economists only hope to control its negative symptoms. As a result, all periods of growth must come to an end, and we are due.

In fact, it is likely we already would have been in recession were it not for the tax cut Republicans passed in 2017. Setting aside arguments over whether their tax cut was equitable or not, it is clear that this tax cut pumped money into an economy that was already at full employment. Basically, the federal government used a tool at its disposal to fight recessions in the middle of an expansion. As a result, the federal government will be less able to address the recession when it inevitably occurs.

What’s more is that the Federal Reserve Board, which has been one of our most effective fighters of recession, also has an empty quiver. Interest rates are still at a historically low rate. Jerome Powell, the Fed’s chairman appointed by Trump, has already announced that it plans to stop increasing interest rates. As a result, if the Fed wants to pump money into an economy that is facing a slowdown, it has a limited ability to do so since the interest rates are already low. Furthermore, Trump has surrounded himself with advisers, including Powell, who have expressed skepticism over Ben Bernanke’s aggressive response to the 2008 recession, an intervention that likely saved us from another Great Depression.

There are longer-term concerns with our economy as well. Fundamentally, what makes an economy grow is larger population (or other inputs, such as land) and technology. Our great periods of economic growth resulted largely from technological innovations such as the railroad, the automobile and the assembly line, and most recently, the internet. But on both fronts we are facing problems. As of now, there is no game-changing innovation on the horizon that will increase individual productivity, and our population growth is slowing — as happens in all developed countries. The solution to these problems? Higher investments in education and research and development, and higher immigration. I don’t think I need to clarify how the current administration feels about these steps.

This is bad news. The long-term good news is that it can be reversed with a serious change in policy. Achieving those long-term goals might be possible for the simple reason that in the short term, Trump stands to have to run for re-election in the midst of a full-blown recession. This would be a serious problem for the Republicans since in the last election, the only rationale they had for their continuing in power was the relatively good economy. Even with that advantage, they faced a groundswell of opposition. Imagine how things will go for them in 2020 if they don’t even have the economy to run on.

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Mike is an Assistant Professor of Management for Legal and Ethical Studies at Oakland U. Mike combines his scholarship with practical experience in politics.

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