The United States Is Not Ready for a Recession, But It Can Be

The United States is currently experiencing one of the longest periods of economic expansion in its history.¹ However, the expansion has not reached all households and many are struggling to cover the costs of basic emergencies.² At the same time, economic growth appears to be slowing, and there are warning signs that a recession is possible in the near future. While downturns are difficult to predict, policymakers have a responsibility both to assess whether the country is prepared for the next recession and to implement approaches to protect Americans from the worst outcomes.

Fortunately, the Federal Reserve and the U.S. government has a variety of tools available to help pull the national economy out of a recession. These tools generally fit into two categories. First, there is monetary policy, which is conducted by the Fed, the independent central bank responsible for setting interest rates, among other things. Second, there is fiscal policy, which is conducted by the executive and legislative branches of the U.S. government. However, these tools may prove less effective in the next recession, in part because the Fed has less room to cut interest rates, its traditional tool to tackle downturns.³ And fiscal policy, while still potentially effective, relies on politicians’ willingness to use it in the right way, which has not always been the case. For example, during the Great Recession, Congress engaged in austerity measures, reducing spending well before the economy fully recovered.⁴

Automatic stabilizers are another tool that can help mitigate the effects of a recession. Enabled once the economy hits a downturn, these stabilizers—such as the expansion of unemployment insurance (UI)—are effective in helping stabilize the economy.⁵ For example, UI kept more than 5 million people out of poverty during the Great Recession and prevented 1.4 million foreclosures.⁶ Unfortunately, since the latest recession, states have reduced these benefits, thereby diminishing their positive effects.⁷

View the complete September 27 article by Olugbenga Ajilore on the Center for American Progress website here.