So, who’s up for an economic recession? And when the next recession happens, who’s up for adding more debt to the existing pool of government red ink?
Those are the questions underpinning a recent white paper by the anti-deficit Committee for Responsible Federal Budget that points that both the fiscal and monetary toolboxes are likely to be much smaller when the next downturn occurs. Admittedly, no one knows when that would be, or how much it would impact the government’s bottom line.
“Since 1970, there has been a recession every 5 ½ years on average. Though it is impossible to predict the timing of the next recession, the fact that one has not occurred in the last 7 years suggests one is likely on the horizon,” the CRFB said. While economists are fond of saying economic expansions don’t die of old age, it is fair to say the older an expansion is, the more likely it is to have an imbalance—overinvestment in real estate, for example—that ends up tipping it into a recession.
And getting out of a recession is expensive. With the Great Recession officially dated from late 2007 to early 2009, the public debt in proportion to the size of the U.S economy shot up, from 35 percent of GDP to 66 percent in 2009. Even with steady, though unspectacular, economic growth since then, the debt is expected to hit 76.6 percent of GDP by the end of September, per the Congressional Budget Office.
On the monetary policy front, the CRFB notes the Federal Reserve’s federal funds rate has fallen from 5.25 percent in 2007, before the recession, to a range of 0.25 percent to 0.5 percent now. Its balance sheet, mainly consisting of U.S. Treasury debt, has increased from a pre-recession $850 billion to $4.5 trillion.
“Our simulations show in ten years, a recession could lift debt levels to within 8 to 17 percent of GDP of the country’s all-time record debt levels set after World War II, leaving less capacity for fiscal stimulus than was available during the Great Recession,” the CRFB said.
Whether that level of debt would cause a debt spiral as investors sought to hedge their investments by demanding higher interest rates is unclear. Japan, for example, had a debt-to-GDP ratio of 247 percent in 2014, while the UK’s was 113 percent, and both have had little trouble borrowing.
But the CRFB says the prudent course is to try not to test the boundaries: “President John F. Kennedy once said, ‘The time to repair the roof is when the sun is shining.’ The time to fix the debt and ensure we have the fiscal space to respond to emergencies is now.”
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