HomeOpinionOpinion | Rescue From Recession Won’t Be So Easy This Time

Opinion | Rescue From Recession Won’t Be So Easy This Time

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Optimism in the face of adversity is an admirable, perhaps defining, American trait. But the line that separates resilient optimism from stubborn self-delusion is a fine one that, when crossed, can bring only the cruel sting of disappointment.

So it’s natural to worry a little for the developing state of mind of the 19% of Americans who rate the economic conditions of the country right now “excellent” or “good,” according to a Quinnipiac poll this month.

Who could they be?

Perhaps if you don’t have an infant fed on baby formula, sold all your crypto investments three months ago, aren’t trying to buy a house or borrow money, don’t have a 401(k) or any exposure to the broader stock market, don’t drive a car (at least not one that runs on gas) and are somehow managing to get a pay raise above the 8.3% at which consumer prices are rising, things must look pretty good.

Or maybe the universe of short-sellers of Netflix (down 73% from its peak) or Peloton (down 89%) with suspiciously good timing is much larger than we had hitherto imagined.

Of course the larger story is that the ranks of the optimistic are thinning rapidly. In late 2019, those halcyon days when Covid-19 was still merely a tremor in the finger of a Wuhan laboratory researcher and Ukraine was a place that got U.S. presidents impeached, 73% of Americans rated the economy excellent or good.

President

Joe Biden

once worked for a man who asked us to believe in the audacity of hope. Less than 18 months into Mr. Biden’s presidency, hope now requires a particular audacity. The same Quinnipiac poll tells us that 80% of Americans rate current economic conditions as either “not so good” or “poor”.

The worry now is that even their apparently realistic assessment doesn’t fully account for the difficulties that lie ahead. The U.S. finds itself trapped in a set of economic circumstances it hasn’t experienced in 40 years. Navigating them successfully will require a degree of policymaking dexterity that has been notably absent in both the monetary and fiscal realms in recent years.

To be fair to the 19%, there are reasons for measured satisfaction. The U.S. economy has recovered more rapidly than most others from the depths of the Covid-19 recession. Demand for labor remains almost desperate. Unemployment is back near its historic trough. Vacancies and voluntary quit rates are both near all-time highs. If you own your home you’re feeling about 30% wealthier than you were before the pandemic.

But there are reasons to think these lingering causes for hope will soon be overwhelmed.

Read More Free Expression

For more than 30 years we have become used to a reassuringly familiar pattern in business cycles. As the economy expands, the Fed raises interest rates to curb inflationary pressures. Eventually some combination of credit squeeze or inventory over-accumulation then precipitates a downturn in the economy. The Fed cuts rates—and in recent cycles, supplied the added sugar of quantitative easing through asset purchases—and soon there’s enough free money to revive the animal spirits and get demand moving again.

This was the pattern in the cycles that ended in each of the last four downturns: the credit crunch recession of 1990-91, the tech-bubble-bursting 2000-01 recession, the Great Recession of 2007-09, and the brief Covid recession of 2020. It is the real economy’s version of the “Fed put,” the comforting notion that, when markets slump, the central bank will come to the rescue with cheap money.

But it was a pattern that was facilitated by the concurrent great disinflation. Every one of those recessions began with the inflation rate lower than it had been at the start of the previous downturn. This provided a permissive environment in which the Fed could aggressively stimulate the economy without fear that any resultant spike in demand would create a destabilizing inflation dynamic. The Fed was able to start cutting rates in 1990, 2001, 2007 and late 2019 because each time inflation was below where it had been at the end of the previous cycle.

The Fed is raising rates again today, as it has in the past, to stave off inflation—an inflation it insisted was transitory only months ago. If the past is any guide, this tightening will soon induce a sharp slowdown in economic activity.

But if the U.S. enters recession later this year, it will do so with an inflation rate still much higher than it was at the start of the last recession. The Fed will then cut rates at its peril—caught between its price-stability and full-employment mandates.

Fiscal policy will have little scope to help. Even as the federal deficit has been falling from a historic high, total debt as a percentage of gross domestic product has doubled since the beginning of the last recession in 2007. Debt held by the public now equals roughly 100% of GDP. Fiscal pump priming at those debt levels will further exacerbate price pressures.

Decades of disinflation encouraged accelerating fiscal recklessness and escalating monetary indulgence. It isn’t just the 19% who are about to discover that these don’t come without costs.

Journal Editorial Report: Inflation and recession fears put the Democrats at risk. Images: AP/Shutterstock Composite: Mark Kelly

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