I worry a lot about how we’re going to handle the next recession.
I’m not sure when it’s going to come or if the yield curve suggests a downturn is imminent, but unless the Fed and Congress are way more competent than I think they are, unemployment will start to tick up and growth will start to slow and turn negative eventually.
When the 2008 downturn hit, the US government used two tools to try to fight it: monetary policy as conducted by the Fed, and fiscal policy as decided on by Congress.
Both helped significantly — and both nonetheless fell short of what the country needed. Millions of people went unemployed who needn’t have, hurting their economic prospects for the rest of their lives and increasing their mortality rates, not least due to suicide.
Fed Chair Ben Bernanke, bafflingly, opted not to cut interest rates to stimulate recovery in September 2008, just as Lehman Brothers was collapsing. The American Recovery and Reinvestment Act of 2009 — or the fiscal stimulus as it’s colloquially known — appears to have worked, but it was too small.
There are plenty of policies that the Fed and Congress could adopt right now that will make a future recession less devastating, or even prevent one entirely. Economists and policy analysts have been proposing a bunch ever since the crash hit.
The basic shared premise behind the ideas is that the system failed last time. There’s no reason unemployment in the US should ever get near to 10 percent, and there’s no reason for a recession and recovery to take as long as they did. Better fiscal, monetary, and legal policy would have pumped more stimulus into the economy and gotten us back to low unemployment and steady growth earlier.
And to prevent individual policymakers from screwing it up next time, many of these proposals incorporate automatic rules that allow stimulus to kick in as soon as economic trouble comes, without waiting for Congress to get to work.
This is hardly an exhaustive list, but here are some of the most dramatic and promising recession-proofing proposals out there.
1) Pay out more food stamps when unemployment is high
The basic rationale for fiscal stimulus during recessions — as conducted in the 2008 Pelosi-Bush stimulus package, or the 2009 stimulus that became synonymous with Obama’s policy on the recovery — is that additional government spending can boost growth, both because the spending itself represents growth and because it can spur spending in the private sector too. That effect is measured by something called the fiscal multiplier, which measures the increase in economic activity for every $1 of government spending or tax cuts.
The multiplier varies widely between different kinds of spending or tax cuts, and arguably the most effective kind of spending is the Supplemental Nutrition Assistance Program (SNAP, or food stamps). Mark Zandi at Moody’s Analytics estimated that $1 in SNAP spending increased growth by $1.74 in 2009, in the depths of the recession, and by $1.22 in 2015, well into the recovery.
Not only did $1 in additional government spending in 2009 add to growth, but it spurred 74 cents’ worth of private sector spending too. (These are rough estimates, it should be said. During the Obama years, I once heard chief economist Jason Furman joke that everyone cited the Zandi numbers because he’s the only person whose estimates had two decimal places.)
SNAP is already what’s called an automatic stabilizer: Because eligibility is determined by income, the number of people getting benefits, and the size of the average benefit, grows during recessions, which automatically helps fight recessions. But Congress could do more. As Jared Bernstein and Ben Spielberg suggested in a Center on Budget and Policy Priorities report, Congress could fund higher SNAP benefits when state unemployment rates increase.
Alan Blinder at Princeton has echoed the idea of making SNAP benefits temporarily higher, and further suggested automatically increasing unemployment insurance payments during recessions (which Zandi’s analysis suggests is nearly as stimulative as food stamps).
2) Automatically cut payroll tax rates
Blinder further suggests cutting payroll tax rates automatically when unemployment rises. This is a fairly common proposal; Obama budget chief Peter Orszag floated it back in 2011, for instance. You could achieve this in a bunch of different ways. You could, as in the 2009 stimulus, establish a separate Making Work Pay tax credit to refund payroll taxes paycheck to paycheck, or you could, as Congress chose to do in 2010, just slash the payroll tax rate directly.
Zandi’s estimates put the multiplier for payroll tax cuts at 1.27 — not as good as unemployment insurance or food stamps, but not bad. And the payroll tax rate is a very simple, clear lever which should be easy to automatically tie to unemployment. You could even imagine the payroll tax rate going negative and adding to paychecks if the situation gets truly dire.
3) Government-created jobs when unemployment rises
Arguably one of the most effective parts of the 2009 stimulus was the TANF emergency fund, which gave money for states to offer subsidized jobs to low-income people under the Temporary Assistance to Needy Families program.
Although the program wasn’t rigorously evaluated, retrospective analyses suggested that the fund was effective at creating work at low cost: $1.3 billion in federal funding led to more than 260,000 new jobs, a ratio of about $5,000 per job created. The fact that the subsidized jobs programs were set up and implemented quickly was also encouraging, suggesting that large-scale direct job creation is administratively possible in the modern era.
The ELEVATE Act, recently introduced by Sen. Ron Wyden (D-OR) and Rep. Danny Davis (D-IL), would set up a similar subsidized job program and tie federal funding for it to state unemployment rates. States would have considerable flexibility in what those subsidized jobs look like, but would be required to adopt models with strong evidence bases.
4) Force down electric, water, heat, and cable bills
In the new book Law and Macroeconomics: Legal Remedies to Recessions, Yale economist and law professor Yair Listokin suggests having utility agencies purposefully hold down rates for gas, electricity, and other basic costs during recessions.
Normally, he notes, utilities do the opposite. People spend less during recessions, which means that utilities normally ask for the ability to raise rates to make up for the money they’re losing. That takes money out of the pockets of families right when the economy needs them to have more money to spend. It’s particularly rough for low-income families, whose utility costs make up a big share of monthly costs.
By contrast, having regulators deny utilities the ability to increase rates, or force them to lower rates, functions as a tax cut that directly increases the spending ability of poor households. That’s not just a stimulus package for Congress or the Fed to enact; it’s something that even city governments could do.
5) Promise to forgive mortgages
Listokin also echoes economists Amir Sufi and Atif Mian’s observation that more pro-consumer mortgage/foreclosure law could lead to more debt forgiveness, more spending, and a faster recovery. He argues that judges ruling on construction projects should default to building rather than not building during recessions, so as not to hold back demand.
This is also an area where Congress can step in. The Obama administration’s main mortgage relief policy targeted mortgage servicers, rather than mortgage holders; indeed, it declined to help mortgage holders by failing to enact cramdown legislation that would allow bankruptcy judges to lower mortgage payments. Passing cramdown would be a good way to preemptively enable judges to lower debt and facilitate the next recovery.
6) Change what the Fed is targeting
Right now, the Federal Reserve says that it’s targeting inflation: It wants overall prices to increase by 2 percent, year over year. That means that if the economy takes a nosedive and prices stop increasing or even start falling, it has committed to take action like cutting interest rates to make prices rise more.
If, by contrast, prices start rising too much (maybe because the economy has recovered, workers start demanding higher wages, those higher wages force employers to raise their prices, etc.), the Fed is committed to raising interest rates to hold inflation in check.
There have been a few problems with this approach. For one thing, the Fed was not able to deliver 2 percent inflation during the recovery from the Great Recession, and kept undershooting that target. That failure might have come about because the Fed’s traditional tool for increasing inflation (lowering interest rates) wasn’t possible: It had set interest rates around zero percent since 2008, and so was limited to quantitative easing (buying up large amounts of long-term bonds to force long-term interest rates down) and making declarations if it wanted to do more to force up inflation.
So a number of economists — including Bentley professor and influential blogger Scott Sumner, former Obama chief economist Christina Romer, and monetary policy expert Michael Woodford — called during the recession for the Fed to adopt something called NGDP targeting.
Instead of targeting a certain level of inflation, the Fed would try to make sure nominal gross domestic product (NGDP) — the total amount of spending in the economy — increases by the same amount each year. If it falls behind, that probably means there’s a recession and the Fed needs to act to get growth higher. If it goes too far ahead, that probably means inflation is getting out of hand and the Fed needs to tighten up.
Compared to an inflation target, an NGDP target would make it clear to markets that the Fed is serious about trying to boost growth and fight unemployment during recessions; it’s not just serious about fighting out-of-control inflation. That signal alone, according to advocates, would reduce the severity of recessions.
“By pledging to do whatever it takes to return nominal GDP to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth,” Romer wrote in 2011. “Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.”
The Fed could decide, on its own, to adopt an NGDP target right now. But Congress could also force it to do so, just as Congress forced it to prioritize both full employment and price stability. In Britain, Parliament sets the inflation target that the Bank of England is expected to enforce. American norms of central bank independence wouldn’t allow that kind of thing, but it’s a totally valid model we could borrow, and it would be well within Congress’s powers to pass a law setting an NGDP target of, say, 5 percent year-over-year growth.
7) Try for higher inflation
Maybe NGDP targeting is a step too far for the Fed; it’s too different from the inflation targeting it’s been doing for years. Arguably a simpler alternative would be to just change the inflation target, from 2 percent to 4 percent.
The Fed can’t put its interest rate too far below zero percent. If rates hit, say, -10 percent, then people would start taking their money out of banks and storing it in cash form. This is known in monetary policy as the “zero lower bound.” But the bound is nominal, not inflation-adjusted. When inflation is 2 percent, a Fed interest rate of zero is effectively a -2 percent rate in real, inflation-adjusted terms.
So Laurence Ball, a professor at Johns Hopkins, has proposed moving to a 4 percent inflation target, which would allow a bottom real rate of negative 4 percent. That gives the Fed a lot more room to operate during downturns.
8) Have the Fed distribute cash directly to people
If all goes according to plan, an NGDP target or higher inflation target would be self-enforcing: the Fed would announce that this is what they’re doing, and then markets would adjust in turn. That’s what optimists like Sumner think would happen.
But let’s say the markets don’t automatically adjust, and demand the Fed take more substantive actions to meet its targets. And let’s say that when the Fed starts to fear it’ll undershoot its NGDP or inflation target, interest rates are already at or near zero percent.
There are a few things it could do. It could buy up Treasury bonds and mortgage-backed securities, like it did during quantitative easing rounds during the last recession. It could junk the QE approach of buying a set amount of assets, and instead say it’s going to just start buying up as much stuff as it can until it reaches its targets. It could follow economist Roger Farmer’s advice and buy up normal stocks, as the Bank of Japan has.
It might make sense, though, for Congress to give it a new tool: helicopter drops. Congress could empower the Fed to print money and distribute it to Americans directly, perhaps through a universal basic income-style cash payment to all adults or households, or by cutting payroll tax rates and paying for the difference in printed money.
This would have a clearer distributional impact than quantitative easing, as it would direct more resources to poor households, and might be more effective in that poor households are likelier to spend additional cash rather than save it.
9) Abolish cash money
The idea of a zero lower bound assumes that central banks can’t set negative interest rates. But that’s not, strictly speaking, true. The European Central Bank and Denmark’s National bank, for instance, have had slightly negative rates since 2014. If you park money with them, you have to pay a fraction of a percent interest back to them.
But there’s a reason both the ECB and Denmark have stuck to mildly negative rates, like negative 0.4 percent (the current ECB rate). If they went strongly negative, then the costs of keeping cash in the banking system, compared to taking it out and storing it in a giant locker Breaking Bad-style, will become overwhelming, and people will just take all their cash out.
So some economists, like Harvard’s Kenneth Rogoff, have called for abolishing cash money and moving to entirely electronic payments to avoid this problem and allow central banks to make interest rates as negative as they like. In its most extreme form, this idea could really hurt poor people who are unbanked, particularly undocumented immigrants who have to be paid in cash. When India tried pulling a few banknotes from circulation in 2016 in a similar maneuver, the results were pretty disastrous.
So Miles Kimball at the University of Colorado has proposed achieving this by retaining paper money but separating its value from that of electronic money. “Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars,” he writes.
“It would be a little less convenient for those who insisted on continuing to use currency, but even there, it would just be a matter of figuring out with a pocket calculator how many extra paper dollars it would take to make up for the fact that each one was worth less than an electronic dollar,” he adds. “That’s it, and we wouldn’t have to worry about the Fed or any other central bank ever again seeming relatively powerless in the face of a long slump.”
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