David Warsh: After the next recession

Unemployed men outside a  soup kitchen opened in 1931 by mobster  Al Capone  in Depression-era Chicago.

Unemployed men outside a  soup kitchen opened in 1931 by mobster Al Capone in Depression-era Chicago.



The biggest problem facing the United States today is the inevitability of the business cycle. The unemployment rate in April reached its lowest rate in 17 years -- 3.9 percent. “Wages not keeping pace,” warned The New York Times. The “historically long jobs expansion… shows little evidence of slowing,” said The Wall Street Journal.

Alarm bells may not be ringing. The 2017 tax-cut stimulus is still working its way into the system. But with the jobless rate at 3.9 percent, wage growth will accelerate. Bottlenecks will form. Interest expenses will grow. Inflation rates will increase.

Sometime in the next two years or so, some combination of factors will force the Federal Reserve Board’s hand. Interest rates will rise more sharply than expected. A recession will begin, with all the usual adverse consequences for federal and state budgets. Then, as Warren Buffett, the Berkshire Hathaway CEO, likes to say, as the tide goes out, we will discover who's been swimming naked – politically, that is, not financially.

Donald Trump is not a factor here. One can’t be certain, but, after the stupendous difficulties of his years in the White House, it seems unlikely that he will choose to run for a second term in 2020. (This view is not yet widely shared.)

Nor are the 2018 midterm elections the issue. The economy won’t turn down before the autumn. Whatever happens to the leadership of  Congress, if the Democrats are smart, there will be no surge to impeach the president. The institutions in place likely are sufficient to restrain Trump’s power and bring matters to their natural conclusion. 

But at a certain point, before or perhaps just after the next presidential election, the economy will turn down. Then the failures of the last 20 years to come to terms with the imbalance of the federal budget will be sorely tested. Tax receipts will fall, expenditures increase; the budget deficit will swell. Even a mild contraction, such as that of March-December 2001, will test the stresses under which the U.S. has been operating for years.  

Over four-fifths of the growth in nominal government spending over the next decade will be driven by Social Security, federal health programs and interest on the debt, according to the Congressional Budget Office. Revenue will fail to keep pace with growing spending, resulting in a deficit that will double in the next 10 years from the anticipated $800 billion at the end of fiscal 2018, according to the CBO’s most recent forecast.

Pessimism is rife. New York Times columnist David Brooks wrote recently that Republicans have become “an aging minority party” while moderate Democrats are “no longer a force.” There are “only two vibrant political tendencies in America right now,” wrote Brooks: “Trump-style populism and Bernie-Sanders/Elizabeth Warren-style progressivism.”

The leaders who exhibit these tendencies will turn out to have been the naked swimmers after the next recession. I have no idea what course the presidential election will look like, but I expect the more consensus-oriented politician will be the winner.

The current crisis of U.S. politics may turn out to resemble the angry mood of the late 1970s, when the tide finally turned against the New Deal consensus that had governed the country pretty much without interruption since 1932. That was nearly 40 years ago – about the length of time that such zig-zag reversals have taken historically. They have become a global phenomenon by now.

When things turn tough in the next recession, a center should form, much as it did in the early 1980s. Commissions will be empaneled, legislators will hold secret weekend negotiations, balanced reforms will be undertaken, some combination of benefit cuts and tax increases. Even now balance is still relatively easy to achieve in the case of Social Security. It is much more difficult to accomplish with respect to federal health programs.

Solvency is the biggest problem facing the United States today. And yet solvency is not just possible, it is likely, given the history of the last 75 years. The growth of interest on government debt will impose its own form of discipline. The alternative, the United States as Argentina or Venezuela, seems too remote for anything but column-fodder.

David Warsh, an economic historian and long-time columnist, is proprietor of economicprincipals.com, where this first ran.