Must-Read: Mark Thoma: Here’s Why We’re Not Prepared for the Next Recession

July 20, 2017

Must-Read: Mark Thoma: Here’s Why We’re Not Prepared for the Next Recession

Must-Read: To leave their successors half a cable off of a lee shore in hurricane season may well turn out to have been the biggest failure of the Bernanke-Yellen Federal Reserve:

Mark Thoma: Here’s Why We’re Not Prepared for the Next Recession: “When will the next recession hit?…

…Will monetary and fiscal policymakers have the ability to respond effectively?… This is not a prediction that a recession is just around the corner…. It’s a warning that we need to be ready in case a recession does hit relatively soon, as it well could. The problem is, we aren’t ready. Even a year or so from now, the Fed’s target interest rate won’t be high enough to leave much room for cuts in response to an economic downturn….

Criticism from the right over the Fed’s quantitative easing policies… related to fears of inflation that never materialized, was loud and widespread on the political right. Without much room to cut interest rates, and without support from the Trump Fed for other stimulative measures, there’s little the Fed will be willing and able to do in response to economic problems. As for fiscal policy, when the recession does hit the economy keep your fingers crossed that Congressional gridlock stops Republicans from making things worse. During the Great Recession, Republicans made it very clear how they will respond when millions and millions of people lose their jobs and need help. First, they will use the recession as an opportunity to argue for their favorite policy, tax cuts for the wealthy… [and] austerity–cuts to government programs. In a recession, spending on social services goes up as more people are in need, and tax revenues fall due to lower incomes, both of which cause a temporary increase in the government deficit….

Our best hope is that the economy remains at full employment long enough for the Fed to restore its ability to cut rates and that Congress is gridlocked when the downturn comes…. It would be hard to be less prepared for a recession than we are right now.


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