America needs to put recession-fighting on autopilot
How the government could help ward off crises before they happen
Last Friday's disappointing jobs report left just about everyone nervously glancing around to see if a recession is looming. But whether a downturn hits in the next few months or the next few years, one thing is certain: America is grossly unprepared. More than that, our policymakers are ignoring one of the most sensible and straightforward ways to prevent recessions — and to make sure that, when they do happen, they're as shallow and brief as possible.
I'm talking about automatic stabilizers. These are spending programs that run on autopilot, reacting to conditions like income levels and employment levels as they change, expanding whenever the economy slumps, and thus stimulating us back to health. SNAP (a.k.a. food stamps), unemployment insurance, and Medicaid all fit the bill: When a household's income falls below a certain level, they automatically become eligible for SNAP and Medicaid. Government spending goes out the door to cover them, no new law from Congress needed. Same thing for unemployment insurance when a person loses their job. If we want to recession-proof our economy, we should be expanding these programs or creating new ones so that safety-net spending ramps up whenever the economy slows down, without Congress passing a new law every time.
Congress can pass individual stimulus measures in response to individual crises, like it did with 2009's stimulus. But by the time that law passed, for example, the Great Recession had already been underway for over a year. Recessions feed on themselves: People lose their jobs, they no longer have their incomes to spend, so businesses lose consumers, even more people lose their jobs, wash and rinse and repeat. Responding to downturns as fast and as aggressively as possible is critical, to put spending money into people's pockets and stop the feedback loop of job loss.
Technically, taxes can serve as automatic stabilizers as well. Tax receipts naturally fall in recessions, thus removing less money from the economy. But taxes are arguably more effective at cooling the economy off when it's booming. Inequality and wage stagnation are also already bad enough that, with the relief lawmakers have introduced into the tax code, over 44 percent of Americans already pay no income tax. We could certainly reform national payroll tax rates to automatically rise in booms and fall in recessions. (Or get rid of payroll taxes entirely.) But between 2009 and 2012, two-thirds of the boost America got from its existing automatic stabilizers came from reduced tax receipts as it is. When it comes to stabilizing recessions, we've squeezed about all we can out of the tax code. Taking advantage of government spending is where we're falling down on the job.
Of course, when spending programs like SNAP and Medicaid automatically expand during recessions, federal deficits automatically increase as well. And that tends to freak politicians out. There's more or less constant pressure to cut these programs, both on budgetary grounds and fears that they discourage people from working. The Trump administration is trying to open options for state lawmakers to slap various work requirements and other conditions on SNAP and Medicaid, for example.
All of this is entirely self-defeating. A recession happens when not enough demand is flowing through the economy. If taxes rose with spending to prevent deficits, the net effect on demand would be zero. Moreover, the U.S. government creates the currency it taxes, spends, and borrows in, so a "debt crisis" is intrinsically impossible. The government can create too much inflation, but that risk comes from pumping too much money into the economy when it's at the peak of the business cycle, not the trough. Finally, if you make receipt of these benefits conditional on having a job, then by definition they can't do anything to arrest the feedback loop of job loss.
If you're legitimately worried that people will find staying on SNAP or unemployment benefits more attractive than taking a job, that tells you something about the quality of the work the labor market is offering them. And the best way to improve the pay and work conditions on offer is to pump more demand into the economy: Increase the demand for labor relative to the supply, and force employers to compete more ferociously for workers. That doesn't mean the "welfare cliff" effect goes away entirely. But beyond improving the quality of people's employment prospects, the way to minimize it is to make the phase-outs for benefits and qualifications as slow and gradual as possible.
If you wanted to get really ambitious, you could imagine something like a self-adjusting universal basic income. A UBI is a monthly check that goes out to all Americans, with no conditions or qualification thresholds whatsoever. It's generally envisioned as a poverty eliminator; but you could also imagine a UBI geared towards stabilizing the economy instead, whose monthly generosity rises or falls in response to metrics like the unemployment rate or the rate of wage growth. Or, if you want to use government spending to directly create jobs, as opposed to just drive more consumption, a national job guarantee is another ideal framework for an automatic stabilizer. (Or, you know, why not both?)
But if we're looking for immediate incremental steps to build on where we are now, we should simplify and expand programs like SNAP and unemployment insurance: Raise the income thresholds for qualifying and increase the generosity of the benefits; remove work requirements and drug testing and other conditions; and make the benefits equally available for families and singles, and people with or without children.
One final wrinkle is state budgets. Unlike the federal government, states can't print U.S. dollars, and can suffer debt crises. While many states have rainy day funds, their ability to deficit spend is more constrained. By their nature, state-level taxing and spending decisions are often a drag on economic recoveries.
The federal government can help in several ways. First, programs like SNAP and Medicaid are often run as partnerships between the states and the federal government. Instead, the federal government should take on the full burden of funding these programs. Second, the federal government could set up permanent streams of money that flow from the national level to the states and localities, and the generosity of the grants could again be designed to automatically increase when the economy nosedives. That would give state and local budgets a lot more room to maneuver, and help spend the economy back to health without the drag of additional tax hikes.
If we want to prevent the next recession, we don't just need to embrace big spending; we need to embrace spending that automatically goes big as soon as it's needed.
Want more essential commentary and analysis like this delivered straight to your inbox? Sign up for The Week’s “Today’s best articles” newsletter here.